EMC Corporation v. Glenn Hegar, Comptroller of Public Accounts of the State of Texas And Ken Paxton, Attorney General of the State of Texas

ACCEPTED

03-15-00113-CV

5989837

THIRD COURT OF APPEALS

AUSTIN, TEXAS

7/8/2015 8:58:20 PM

JEFFREY D. KYLE

CLERK

No. 03-15-00113-CV

In the Court of Appeals 3rd COURT FILED IN

OF APPEALS

AUSTIN, TEXAS

for the Third Judicial District7/8/2015 8:58:20 PM

JEFFREY D. KYLE

Austin, Texas Clerk

EMC 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 CHARLES K. ELDRED

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 Conditionally Requested

IDENTITY OF PARTIES AND C OUNSEL

Plaintiff/Appellant

EMC Corporation

Trial and Appellate Counsel for Plaintiff/Appellant

Doug Sigel (Doug.Sigel@RyanLawLLP.com)

State Bar No. 18347650

RYAN LAW FIRM, LLP

100 Congress Avenue, Suite 950

Austin, Texas 78701

(512) 459-6000

(512) 459-6601 [fax]

Appellate Counsel for Plaintiff/Appellant

Ryan Cotter (Ryan.Cotter@RyanLawLLP.com)

State Bar No. 24075969

RYAN LAW FIRM, LLP

100 Congress Avenue, Suite 950

Austin, Texas 78701

(512) 459-6000

(512) 459-6601 [fax]

Trial Counsel for Plaintiff/Appellant

Olga Goldberg (olga.goldberg@sutherland.com)*

State Bar No. 24083081

SUTHERLAND ASBILL & BRENNAN LLP

1001 Fannin, Suite 3700

Houston, Texas 77002

(713) 470-6121

(713) 654-1301 [fax]

* Ms. Goldberg was associated with Ryan Law Firm LLP when she appeared as trial counsel.

She is no longer counsel in this case. Her current contact information is listed here.

Trial Counsel for Plaintiff/Appellant (continued)

Gavin Justiss**

State Bar No. 24070027

MACDONALD DEVIN

3800 Renaissance Tower

1201 Elm Street

Dallas, Texas 75270

(214) 744-3300

(214) 747-0942 [fax]

Defendants/Appellees

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

Ken Paxton, Attorney General of the State of Texas***

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]

** Mr. Justiss was associated with Ryan Law Firm LLP when he appeared as trial counsel.

He is no longer counsel in this case. His current contact information is listed here.

*** 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).

ii

Trial and Appellate Counsel for Defendants/Appellees

Charles K. Eldred (charles.eldred@texasattorneygeneral.gov)

Assistant Attorney General

State Bar No. 00793681

OFFICE OF THE ATTORNEY GENERAL

P.O. Box 12548 (MC 017)

Austin, Texas 78711-2548

(512) 475-1743

(512) 477-2348 [fax]

iii

TABLE OF C ONTENTS

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

Index of Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . x

Statement of the Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxii

Statement Regarding Oral Argument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxiii

Issues Presented . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxiv

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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

3. Narrow exceptions to the gross-receipts

method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

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

iv

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

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

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

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

4. Compact provisions addressing joinder,

withdrawal, and severability . . . . . . . . . . . . . . . . . . . 11

C. State Variations from the Compact’s Income-Tax

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

III. The Franchise Tax and the Compact . . . . . . . . . . . . . . . . . . . . . . 13

IV. EMC’s Tax-Refund Suit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

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

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

I. In Calculating Its Franchise Tax, EMC 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

v

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

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. . . . . . . . . . . . . . . . . . . . . . . . . . 23

b. The franchise tax does not meet the

Compact’s definition of an “income tax” on

its own terms. . . . . . . . . . . . . . . . . . . . . . . . . . . 24

4. The Compact’s definition of “gross receipts tax”

does not support EMC’s argument that the

franchise tax falls within the Compact’s “income

tax” definition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

5. The Georgia Tax Tribunal’s analysis in

Rosenberg v. MacGinnittie is inapposite. . . . . . . . . 27

C. Section 171.106’s Mandate to Use the Gross-Receipts

Method Prevails over Any Conflicting Language in the

Compact. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

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

section 171.106(a) prevails over the Compact. . . . . 29

vi

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

harmonized so that both apply to the franchise

tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

3. The presumption against implied repeals does

not support EMC’s reading of the Tax Code. . . . . 33

4. IBM v. Department of Treasury is

distinguishable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

a. The Michigan Supreme Court was evenly

divided on the implied-repeal issue. . . . . . . . 36

b. The IBM plurality opinion hinges on

Michigan’s distinct tax history. . . . . . . . . . . . 37

c. The IBM plurality misconstrued Article

III.1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

5. The rule that ambiguous tax statutes must be

construed in taxpayers’ favor does not apply

here. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

1. The term “compact” does not make this

Compact binding. . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

vii

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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

b. The Compact provisions do not require

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

c. The Compact does not prohibit unilateral

repeal or modification. . . . . . . . . . . . . . . . . . . 48

4. The Compact is an advisory compact with

uniform laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

C. The Compact Does Not Preclude the Legislature from

Mandating Exclusive Use of Section 171.106’s Gross-

Receipts Apportionment Method. . . . . . . . . . . . . . . . . . . . 53

1. Article III.1 does not unambiguously bar the

Legislature from enforcing an exclusive

apportionment method. . . . . . . . . . . . . . . . . . . . . . . . 54

2. Article III.1 cannot constitutionally require

Texas to allow a taxpayer to remove part of its

tax base from Texas’s taxing authority. . . . . . . . . . 56

D. The Compact Does Not Supersede Section 171.106

Because Any Conflict Does Not Unconstitutionally

Impair Any Contractual Obligations. . . . . . . . . . . . . . . . . 59

viii

1. Binding compacts that Congress has not

approved preempt state law only if the law

unconstitutionally impairs contractual

obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

2. Section 171.106 does not unconstitutionally

impair any obligations to EMC under the

Compact. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

3. EMC waived the Contracts Clause issue. . . . . . . . . 65

III. EMC’s As-Applied Constitutional Challenges Are

Jurisdictionally Barred, Waived, And Meritless. . . . . . . . . . . . 66

Prayer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

Certificate of Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Certificate of Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Appendix

ix

INDEX OF AUTHORITIES

Cases

Alabama v. North Carolina,

560 U.S. 330 (2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51, 55

Allied Stores of Ohio, Inc. v. Bowers,

358 U.S. 522 (1959) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

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

348 S.W.3d 894 (Tex. 2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

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

57 F.3d 385 (4th Cir. 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63, 64

Combs v. Chapal Zenray,

357 S.W.3d 751 (Tex. App.—Austin 2011, pet. denied) . . . . . . . . . . . . 40

Combs v. Chevron, Inc.,

319 S.W.3d 836 (Tex. App.—Austin 2010, pet. denied) . . . . . . . . . . . . 67

Cuyler v. Adams,

449 U.S. 433 (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Employees Ret. Sys. v. Duenez,

288 S.W.3d 905 (Tex. 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

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

459 U.S. 400 (1983) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63-65

Foster v. TDCJ,

344 S.W.3d 543 (Tex. App.—Austin 2011, pet. denied) . . . . . . . . . . . . 26

Gaar, Scott & Co. v. Shannon,

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

aff’d, 223 U.S. 468 (1912) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

x

Gen. Dynamics Corp. v. Sharp,

919 S.W.2d 861 (Tex. App.—Austin 1996, writ denied) . . . . . . . 2, 65, 69

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

163 N.W.2d 413 (Iowa 1968) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Gordon v. Lake,

356 S.W.2d 138 (Tex. 1962) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Graphic Packaging Corp. v. Hegar,

No. 03-14-00197-CV (Tex. App—Austin) (argued June 3, 2015) . . . xxiii

Green v. Biddle,

21 U.S. (8 Wheat.) 1 (1823) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Hess v. Port Authority Trans-Hudson Corp.,

513 U.S. 30 (1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

IBM v. Dep’t of Treasury,

852 N.W.2d 865 (Mich. 2014) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35-40

In re Nestle USA, Inc.,

359 S.W.3d 207 (Tex. 2012) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

In re Nestle USA, Inc.,

387 S.W.3d 610 (Tex. 2012) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2, 70

In re Park Mem’l Condo. Ass’n,

322 S.W.3d 447 (Tex. App.—Houston [14th Dist.] 2010, no pet.) . . . . 68

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

No. 11-000035-MT, slip op. (Mich. Ct. Cl. Dec. 19, 2014) . . . . . . . . . . . 46

INOVA Diagnostics, Inc. v. Strayhorn,

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

xi

Jackson v. SOAH,

351 S.W.3d 290 (Tex. 2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Kimberly Clark Corp. v. Comm’r of Revenue,

No. 8670-R, slip op. (Minn. Tax Ct. June 19, 2015)

(en banc) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56, 58-59, 64

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

187 S.W.3d 808 (Tex. App.—Austin 2006, pet. denied) . . . . . . . . . . . . 63

McComb v. Wambaugh,

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

Moorman Mfg. Co. v. Bair,

437 U.S. 267 (1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48, 64, 65

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

470 U.S. 451 (1985) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

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

Rathbun v. State,

280 N.W. 35 (Mich. 1938) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Rosenberg v. MacGinnittie,

No. 1414626, slip op. (Ga. Tax Trib. Nov. 25, 2014) . . . . . . . . . . . . 28, 29

Seattle Master Builders Ass’n v. Pac. Nw. Elec. Power &

Conservation Planning Council,

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

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

406 S.W.3d 177 (Tex. 2013) (per curiam) . . . . . . . . . . . . . . . . . . . . . . . . 24

xii

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

71 S.W.3d 846 (Tex. App.—Austin 2002, no pet.) . . . . . . . . . . . . . . . . . 66

Tarrant Reg’l Water Dist. v. Hermann,

133 S. Ct. 2120 (2013) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50, 55, 56, 59

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

434 U.S. 452 (1978) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 44-48, 53, 62

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

431 U.S. 1 (1977) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63-64, 66

Vincent v. Bank of Am., N.A.,

109 S.W.3d 856 (Tex. App.—Dallas 2003, pet. denied) . . . . . . . . . . . . . 68

W. Union Tel. Co. v. Kansas,

216 U.S. 1 (1910) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

W. Union Tel. Co. v. State,

126 S.W. 1197 (Tex. 1910) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

West Virginia ex rel. Dyer v. Sims,

341 U.S. 22 (1951) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61, 62

Constitutional Provisions, Statutes, and Rules

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

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

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

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

1897 Tex. Gen. Laws 140 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

xiii

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

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

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

1991 Tex. Gen. Laws 134 . . . . . . . . . . . . . . . . . . . . . . . . . 3, 6-7, 14, 30, 34

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

1959 Tex. Gen. Laws 187 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-3, 5

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

1989 Tex. Gen. Laws 200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6, 35

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

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

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

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

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

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

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

1969 Tex. Gen. Laws 61 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 35

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

2006 Tex. Gen. Laws 1 . . . . . . . . . . . . . . . . . . . . . . . 3, 5, 14, 21, 23, 24, 34

Act of May 30, 1997, 75th Leg., R.S., ch. 1185, § 7,

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

Act of May 31, 1981, 67th Leg., R.S., ch. 389, § 1,

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

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

ALASKA CONST. art. IX, § 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

xiv

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

ARK. CONST. art. 16, § 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

CAL. CONST. art. XIII, § 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

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

COLO. REV. STAT. § 24-60-1301 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

COLO. REV. STAT. § 39-22-303.5(4)(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

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

FLA. STAT. § 220.15(4) (1971) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

HAW. CONST. art. VII, § 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

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

ILL. CONST. art. IX, § 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

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

MICH. CONST. art. IX, § 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

MINN. CONST. art. X, § 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

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

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

MO. CONST. art. X, § 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

MONT. CONST. art. VIII, § 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

N.D. CONST. art. X, § 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

xv

O.C.G.A. § 48-7-27(d)(1)(C) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

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

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

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

S.D. CONST. art. XI, § 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

TEX. CONST. art. I, § 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

TEX. CONST. art. VIII, § 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

TEX. FAM. CODE § 60.010, art. XII.A.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

TEX. GOV’T CODE § 311.005(13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

TEX. GOV’T CODE § 311.025(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

TEX. GOV’T CODE § 311.026(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

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

TEX. GOV’T CODE § 510.017, art. XIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

TEX. R. APP. P. 38.1(i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

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

TEX. R. CIV. P. 301 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

TEX. TAX CODE § 112.151(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

TEX. TAX CODE § 112.152(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

TEX. TAX CODE § 141.001 . . . . . . . . . . . . . . . . . . . . . . . . . . . xxii, 8, 13, 18, 19, 21

xvi

TEX. TAX CODE § 141.001, art. I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 52

TEX. TAX CODE § 141.001, art. II.4 . . . . . . . . . . . . . . . . . . . . . . . . . 23, 24, 25, 28

TEX. TAX CODE § 141.001, art. II.9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

TEX. TAX CODE § 141.001, art. III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20, 30

TEX. TAX CODE § 141.001, art. III.1 . . . . . . . . . . . . . . . . . . . . . 11, 20, 32, 39, 54

TEX. TAX CODE § 141.001, art. III.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

TEX. TAX CODE § 141.001, art. III.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 20

TEX. TAX CODE § 141.001, art. IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 20, 30

TEX. TAX CODE § 141.001, art. IV.2 . . . . . . . . . . . . . . . . . . . . . . . . 10, 20, 21, 22

TEX. TAX CODE § 141.001, art. IV.2-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

TEX. TAX CODE § 141.001, art. IV.9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 21

TEX. TAX CODE § 141.001, art. VI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

TEX. TAX CODE § 141.001, art. VI.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

TEX. TAX CODE § 141.001, art. VI.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 46

TEX. TAX CODE § 141.001, art. VI.4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

TEX. TAX CODE § 141.001, art. VII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

TEX. TAX CODE § 141.001, art. VII.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

TEX. TAX CODE § 141.001, art. VIII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

TEX. TAX CODE § 141.001, art. VIII.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47, 49

xvii

TEX. TAX CODE § 141.001, art. X . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

TEX. TAX CODE § 141.001, art. X.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8, 57

TEX. TAX CODE § 141.001, art. X.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 49

TEX. TAX CODE § 141.001, art. XII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 57

TEX. TAX CODE § 141.001, art.IV.1(g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

TEX. TAX CODE § 141.001, art.IV.10-17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

TEX. TAX CODE § 141.001, arts. II-V . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

TEX. TAX CODE § 141.001, arts. I-XII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

TEX. TAX CODE § 171.002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 7, 21

TEX. TAX CODE § 171.101 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3, 4, 21

TEX. TAX CODE § 171.101(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 25

TEX. TAX CODE § 171.101(a)(1)(B)(ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 25

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

TEX. TAX CODE § 171.101(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

TEX. TAX CODE § 171.101(B)(i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 25

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

TEX. TAX CODE § 171.106(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

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

xviii

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

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

TEX. TAX CODE § 171.1011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

TEX. TAX CODE § 171.1011(e)-(x) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

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

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

TEX. TAX CODE § 171.1014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24, 34

TEX. TAX CODE § 171.1014(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 15

TEX. TAX CODE § 171.1016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 22

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

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

TEX. TAX CODE § 171.1016(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23, 26

TEX. TRANSP. CODE § 523.007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

U.S. CONST. art I, § 10, cl. 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

U.S. CONST. art. I, § 10, cl. 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

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

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

WASH. CONST. art. 7, § 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

WYO. CONST. art. 15, § 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

xix

Other Authorities

BLACK’S LAW DICTIONARY (9th ed. 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

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

CAROLINE N. BROUN, ET AL.,

THE EVOLVING USE AND THE CHANGING

ROLE OF INTERSTATE COMPACTS:

A PRACTITIONER’S GUIDE (2006) . . . . . . . . . 43, 44, 46, 47, 51, 52, 53, 60

COMPTROLLER’S DECISION NOS. 104,752 & 104,753 (2011) . . . . . . . . . . . . . 41

WILLIAM FLETCHER,

FLETCHER CYCLOPEDIA OF THE LAW OF CORPORATIONS (2014) . . . 26

WALTER HELLERSTEIN,

STATE TAXATION (3d ed. 2014) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Annual Reports, MULTISTATE TAX COMM’N,

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

MULTISTATE TAX COMM’N, FIRST ANNUAL REPORT (1969),

available at http://www.mtc. gov/uploadedFiles/

Multistate_Tax_Commission/Resources/Archives/

Annual_Reports/FY67-68.pdf . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Member States, MULTISTATE TAX COMM’N, http://www.mtc.gov/

The- Commission/Member-States (last visited July 7, 2015) . . . . . . . . 8

SELECT COMM. ON TAX EQUITY,

RETHINKING TEXAS TAXES (Jan. 1989) . . . . . . . . . . . . . . . . . . . . . . . 6, 35

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

SUTHERLAND STATUTES AND STATUTORY

CONSTRUCTION (7th ed. 2009) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59-60

xx

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

TEX. JUR. 3d Statutes § 62 (2015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

UNIF. DIV. OF INCOME FOR TAX PURPOSES ACT,

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

David A. Vanderhider,

Comment, A Marginal Tax: The New Franchise

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

xxi

STATEMENT OF THE C ASE

Nature of the Case: EMC Corporation filed this tax-refund suit against

the Comptroller and the Attorney General

(collectively, “the Comptroller”) to recover franchise

taxes that it paid to the State for report years 2010-

2012. CR.4-10.1 EMC 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.6.

Trial Court: 353rd Judicial District Court, Travis County

The Honorable Darlene Byrne (presiding)

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

judgment. CR.666-1165.

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

Disposition: judgment motion, denied EMC’s summary-judgment

motion, and rendered final judgment for the

Comptroller. CR.1172.

1. Citations of the clerk’s record will appear as “CR.[page number].” Citations of the

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

xxii

STATEMENT REGARDING O RAL ARGUMENT

Oral argument is not necessary. All but two pages of the Argument

section in EMC’s opening brief concern the precise issues that the Court will

decide in Graphic Packaging Corp. v. Hegar, No. 03-14-00197-CV, which was

submitted with oral argument on June 3, 2015. EMC Br. 7-20. And, as

discussed below, those two remaining pages concern issues that EMC waived

by failing to present them in its motion for rehearing before the Comptroller or

its petition in this suit. See infra Argument, Part III. Because the Court’s

decision in Graphic Packaging will control the only properly preserved issues

in this case, hearing oral argument will not be an efficient use of the Court’s or

the parties’ resources.

That said, if the Court sets this case for oral argument, the Comptroller

respectfully requests the opportunity to participate.

xxiii

ISSUES PRESENTED

This appeal primarily concerns whether a taxpayer may reduce its

franchise-tax liability by choosing to apportion its margin to Texas using the

Multistate Tax Compact’s three-factor method for apportioning business

income for a state income tax, rather than using the single-factor method for

apportioning margin for the franchise tax set forth in section 171.106 of the Tax

Code. If taxpayers must use the single-factor method, EMC further contends

that applying that method to its business in particular violates the Due Process

and Commerce Clauses of the United States Constitution and the Equal and

Uniform Taxation Clause of the Texas Constitution.

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 single-factor

method the exclusive method for apportioning margin?

4. Did EMC preserve its due-process, commerce-clause, and

equal-and-uniform-taxation challenges for review?

5. Does application of the single-factor method to EMC violate

the Due Process, Commerce, or Equal and Uniform Taxation

Clauses?

xxiv

No. 03-15-00113-CV

In the Court of Appeals

for the Third Judicial District

Austin, Texas

EMC 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 EMC’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 EMC’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) (Nestle II). 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.” Act approved Apr. 30, 1897, 25th Leg., R.S., ch. 104, § 1, 1897 Tex.

Gen. Laws 140, 141 (“authorized capital stock”); Act of July 30, 1959, 56th Leg.,

2

3d C.S., ch. 1, § 1, 1959 Tex. Gen. Laws 187, 306 (“taxable capital”); Act of May

31, 1981, 67th Leg., R.S., ch. 389, § 1, 1981 Tex. Gen. Laws 1490, 1697 (same).

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

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

subtracting bad debts and other items included as revenue on the federal

return. TEX. TAX CODE §§ 171.101, .1011. Receipts associated with various

transactions are also excluded from total revenue. 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

(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, 126 S.W. 1197, 1197 (Tex. 1910) (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

4

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).

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.

5

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 the Committee’s recommendation 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.

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.

6

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).

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).

7

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. TEX. TAX

CODE § 141.001 (App. A).

By its terms, id., art. X.1, the Compact became effective in August 1967,

after seven states had enacted it in their state laws, 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 July 7, 2015).

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

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

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

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

9

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. Compact provisions addressing joinder, withdrawal, and

severability

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; App. B at 8, and enacted a mandatory three-factor

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

§ 220.15(4) (1971); App. B at 15. At the following Commission meeting, Florida

11

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

Multistate Tax Compact.” CR.879. 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.

12

! 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).

! 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.”).

13

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

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

14

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

171 otherwise does not refer to the Compact.

IV. EMC’S TAX-REFUND SUIT

For report years 2010 through 2012, EMC calculated its franchise tax

using the gross-receipts apportionment method required by section 171.106.

CR.716. EMC later filed amended reports for those years that re-apportioned

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

CR.717. Based on those amended reports, EMC filed refund claims of

$1,132,972.54 (2010), $2,110,606.50 (2011), and $2,305,684.62 (2012). Id.

The Comptroller denied EMC’s refund claims, reasoning that section

171.106 required EMC to use the gross-receipts method to apportion its

margin. CR.1139-42.

EMC filed a motion for rehearing with the Comptroller. CR.8-10. The

sole ground of error presented in the motion was: “Texas is required to allow

taxpayers to follow Article IV of the Multistate Tax Compact since Texas was

a member of the compact for the years at issue.” CR.8. The Comptroller

denied the motion. CR.718.

EMC then filed this tax-refund suit. CR.4-10. EMC sought to recover

$5,549,263.66—the sum of its refund claims—on the sole ground that, under the

15

Compact, Texas was required to allow EMC to apportion its margin using the

Compact’s three-factor income-apportionment method. CR.5-6.

The parties filed cross-motions for summary judgment. CR.666-1165.

The district court granted the Comptroller’s motion, denied EMC’s motion, and

rendered final judgment for the Comptroller. CR.1172. This appeal followed.

CR.1166.

SUMMARY OF THE ARGUMENT

As a matter of Texas law, EMC 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 EMC to apportion its margin to Texas using that statute’s gross-

receipts method. But even if EMC 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 to

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

171.106 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

16

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.

Moreover, any conflict with the Compact would not automatically render

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

qualified as an unconstitutional impairment of contractual obligations under the

Compact—a standard that EMC cannot meet here.

Finally, the Court should reject EMC’s arguments based on the Due

Process, Commerce, and Equal and Uniform Taxation Clauses. EMC waived

those issues by failing to raise them in its motion for rehearing before the

Comptroller and its petition in this suit. And EMC has not established a

violation of those provisions in any event.

17

ARGUMENT

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

MARGIN TO TEXAS USING THE GROSS-RECEIPTS METHOD IN SECTION

171.106 OF THE TAX C ODE.

EMC 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. EMC Br. 7-10. Specifically, EMC 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 exceptions “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 EMC concedes is “unambiguous,” EMC Br.

9—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 EMC’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.

EMC 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.” 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. 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 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., art.

III.1. Under Article IV, a taxpayer “shall allocate and apportion his net income

20

as provided in this article,” id., art. IV.2, which states 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

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

21

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 for the report year. 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 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

22

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.

EMC counters that the Compact defines “income tax” broadly enough to

cover the franchise tax. EMC Br. 15-16. 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, EMC urges,

Articles III and IV apply to the franchise tax, EMC Br. 15-16, 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. EMC is wrong.

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

23

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.”

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

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.

24

EMC argues that the definition’s “including” clause captures the

franchise tax. EMC Br. 15-16. 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 EMC.

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). EMC tries to dodge that

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

revenue. EMC Br. 15. But the Compact’s “income tax” definition requires

deduction of “expenses,” not prescribed percentages of revenue or dollar

amounts. 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

25

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 remove the definition too far from its main clause, which defines an

“income tax” as one imposed on “net income.” The “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).

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,

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.

26

4. The Compact’s definition of “gross receipts tax” does not

support EMC’s argument that the franchise tax falls

within the Compact’s “income tax” definition.

EMC also cites the Compact’s definition of a “gross receipts tax,”

apparently to imply that, because the franchise tax does not meet that

definition, it must be categorized as an “income tax.” See EMC Br. 16. But the

Compact does not demand that a tax be classified as either a “gross receipts

tax” or an “income tax.” 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.” TEX. TAX CODE § 141.001, art. II.9 (emphasis added). The

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

defined category. The franchise tax is an example, 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). Accordingly, the “gross receipts tax” definition does not

advance EMC’s argument.

5. The Georgia Tax Tribunal’s analysis in Rosenberg v.

MacGinnittie is inapposite.

Finally, EMC asserts that the Georgia Tax Tribunal “has construed the

Texas franchise tax as an ‘income tax,’ to which the Multistate Tax Compact

27

election is applicable.” EMC Br. 19 (citing Rosenberg v. MacGinnittie, No.

1414626, slip op. (Ga. Tax Trib. Nov. 25, 2014) (found at CR.1079-1122)). EMC

is wrong.

Rosenberg did not address whether the Compact applies to Texas’s

franchise tax; in fact, the opinion did not even mention the Compact. Nor did

Rosenberg concern whether the franchise tax is an “income tax” in any general

sense. CR.1119 (explaining that “the issue in this case is not whether the Texas

Franchise Tax is an ‘income tax.’”).

At issue in Rosenberg was whether the Texas franchise tax qualified as

a “‘tax on or measured by income’” under a Georgia tax statute. CR.1088

(quoting O.C.G.A. § 48-7-27(d)(1)(C)). If it did, the taxpayer could make an

adjustment for its Texas franchise-tax payments in computing its Georgia

income tax. Id. The tribunal held that the Texas franchise tax did qualify,

primarily because the margin calculation starts with “total revenue,” which is

the sum of relevant items reported as “gross income” on a federal tax return.

CR.1097-1100.

Rosenberg’s analysis has no bearing on this case. Whereas Rosenberg

concerned whether the Texas franchise tax is a “tax on or measured by

income,” CR.1088 (emphasis added), the Compact defines an “income tax” as

28

a “a tax imposed on or measured by net income,” TEX. TAX CODE § 141.001, art.

II.4 (emphasis added). The Rosenberg tribunal itself specifically distinguished

“income” from “net income,” CR.1103-04, and concluded that whether the Texas

franchise tax is measured by “net income” was irrelevant to the question before

it, CR.1102-12. For that reason, it specifically declined to follow decisions from

other state revenue departments holding that the Texas franchise tax is not

imposed on or measured by “net income.” CR.1115-16. Because the Compact

likewise defines its reach in terms of “net income,” Rosenberg is inapposite.

C. Section 171.106’s Mandate to Use the Gross-Receipts Method

Prevails over Any Conflicting Language in the Compact.

EMC’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.

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 EMC

29

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 any conflict resulting from EMC’s

interpretation 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 1991.2 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 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. 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)).

30

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

harmonized so that both apply to the franchise tax.

EMC 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 harmonized to reconcile the various provisions and stand

together.” EMC Br. 11. 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).

EMC’s harmonizing argument hinges on semantics. First, EMC heralds

that “[t]here is no overriding mandate in Section 171.106(a) that taxpayers must

use the Texas formula instead of the Multistate Tax Compact formula.” EMC

Br. 9. But section 171.106(a) expressly requires all taxpayers to use the gross-

receipts method “[e]xcept as provided by this section,” and the Compact is not

one of the provided exceptions. TEX. TAX CODE § 171.106(a). EMC 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.”

EMC Br. 9, 10. That is no distinction at all. If a taxpayer can apportion its

31

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.

EMC further claims that Article III.1’s “taxpayer option” harmonizes the

statutes “because a taxpayer that does not elect to use the Multistate Tax

Compact formula effectively elects to use the Texas formula.” EMC Br. 10.

But Article III.1 does not do the harmonizing work that EMC ascribes to it.

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 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).

32

3. The presumption against implied repeals does not

support EMC’s reading of the Tax Code.

EMC next asserts that “the only argument” supporting the Comptroller’s

position is 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 defeat that argument. EMC Br. 10-11. That contention

fails on several fronts.

As an initial matter, the Court also can agree with the Comptroller by

recognizing, as the Legislature did, 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, EMC admits that implied repeals are merely “disfavor[ed],”

not forbidden. EMC Br. 10. “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, 356 S.W.2d 138, 139 (Tex. 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” clause embraces all

apportionment options for the franchise tax, and thus necessarily repeals those

articles’ application.

33

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 total ban 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.

When the Legislature wanted to provide a generally available alternative

to the gross-receipts method, it did so expressly in the franchise-tax statutes.

34

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.

4. IBM v. Department of Treasury is distinguishable.

EMC suggests that the Court seek guidance on the statutory-construction

issue from IBM v. Department of Treasury, 852 N.W.2d 865 (Mich. 2014),

calling it “an identical case” and involving a “directly analogous” situation.

EMC Br. 16-18. But IBM is largely distinguishable, and the reasoning on which

EMC relies is unpersuasive.

35

a. The Michigan Supreme Court was evenly divided on

the implied-repeal issue.

As a threshold matter, EMC inaccurately cites IBM as a controlling

opinion of the Michigan Supreme Court. Id. To be clear, a three-justice

plurality opined that one may harmonize the Compact and Michigan’s

mandatory sales-factor apportionment statute by treating the mandatory sales-

factor method as an option that a taxpayer may elect under Article III.1 of the

Compact. 852 N.W.2d at 871-76 (plurality op.) (Viviano, J., joined by

Cavanaugh and Markman, JJ.). The same number of justices disagreed,

reasoning that (1) reading the mandatory sales-factor method as optional does

not harmonize the statutes; and (2) as the later-enacted statute, the mandatory

sales-factor method impliedly, but necessarily, repealed Article III.1’s

“taxpayer option.” Id. at 882-85 (McCormack, J., dissenting, joined by Young,

C.J., and Kelly, J.).

The remaining justice stated that the implied-repeal issue was “a very

close question” that he did not need to reach because of an intervening

legislative act. Id. at 881-82 (Zahra, J., concurring). Specifically, the Michigan

Legislature directly amended the Compact to provide that Article IV’s three-

factor method would be unavailable beginning in 2011. Id. By doing so, Justice

36

Zahra reasoned, the Legislature had affirmatively created a pre-2011 “window”

(which encompassed the refund claims at issue) in which the Compact’s

“taxpayer option” would be available. Id.

Because the Texas Legislature never has affirmatively created a window

in which the Compact’s “taxpayer option” was operative, Justice Zahra’s

decisive concurrence is inapposite. What remains of IBM’s “guidance,” then,

is an evenly divided court on the implied-repeal issue. Of those opinions, the

Comptroller maintains that Justice McCormack had the better view: treating

a mandatory apportionment method as optional is not a “harmonious

construction”; rather, the mandatory apportionment statute should prevail as

the later enacted statute. Id. at 882-85 (McCormack, J., dissenting).

b. The IBM plurality opinion hinges on Michigan’s

distinct tax history.

In any event, the IBM plurality opinion offers EMC no help. The

plurality began its discussion by noting that “the history of business taxation in

Michigan” is “important to our analysis in this case.” Id. at 869 (plurality op.).

Specifically, the plurality stressed that history’s role in the statutory-

construction analysis because “‘[t]he endeavor should be made, by tracing the

history of legislation on the subject, to ascertain the uniform and consistent

37

purpose of the legislature, or to discover how the policy of the legislature with

reference to the subject matter has been changed or modified from time to

time.’” Id. at 872 (quoting Rathbun v. State, 280 N.W. 35, 43 (Mich. 1938)).

That history led the plurality to conclude that the Michigan Legislature

“uniform[ly] and consistent[ly]” intended “for the Compact’s election provision

to operate alongside Michigan’s tax acts.” Id. at 874.

Texas’s history of business taxation does not support the same conclusion.

For example, when Michigan adopted the Compact, it already had an income

tax to which Articles III and IV would apply. Id. at 870. By contrast, when

Texas adopted the Compact, it had nothing even resembling an income tax,

meaning that Articles III and IV were inoperative when enacted. See supra

Part I.C.3. Also, as the IBM plurality emphasized, “[t]hroughout the evolution

of [Michigan’s] method of business taxation, the Compact has remained in

effect.” 852 N.W.2d at 871 (plurality op.). But in Texas, when the Legislature

added the earned-surplus tax base that potentially qualified the franchise tax

as an income tax, it simultaneously overrode the Compact’s application by

enacting former section 171.112(g). See supra Part I.C.3. And while Michigan

continues to “allow[] a taxpayer to petition to use another apportionment

method,” 852 N.W.2d at 875 n.55 (plurality op.), Texas revoked that option in

38

1989 specifically to preclude foreign corporations from using property and

payroll factors to apportion their tax bases, see supra Part I.C.3.

In sum, in no sense does the history of Texas’s franchise tax reveal a

“uniform and consistent purpose” by the Legislature to allow taxpayers to

invoke the Compact’s “taxpayer option” and use its three-factor income-

apportionment method. To the contrary, the Legislature has uniformly and

consistently acted to preclude application of Articles III and IV to the franchise

tax.

c. The IBM plurality misconstrued Article III.1.

Finally, the IBM plurality’s analysis is unpersuasive. To support its view

that the Compact may be reconciled with Michigan’s mandatory sales-factor

apportionment method, the plurality reasoned that Article III.1 “contemplat[es]

the future enactment of a state income tax with a mandatory apportionment

formula different from the Compact’s.” 852 N.W.2d at 874 (plurality op.)

(emphasis added). Article III.1 says no such thing. Again, it presumes only

that a state’s tax laws (outside the Compact) “provide[]” a different “manner”

of apportioning income. TEX. TAX CODE § 141.001, art. III.1. It does not

address the situation in which a state’s tax law expressly makes an

39

apportionment method exclusive, as section 171.106(a) does. The Court should

decline to follow the IBM plurality’s misreading of the Compact.

5. The rule that ambiguous tax statutes must be construed

in taxpayers’ favor does not apply here.

Finally, EMC suggests that, to the extent section 171.106’s effect on the

Compact’s application is ambiguous, the Court must resolve that ambiguity in

EMC’s favor by applying the rule that “[a]ny ambiguity in the Tax Code

regarding the scope of taxation must be resolved in favor of taxpayers.” EMC

Br. 8. That is incorrect.

The rule EMC invokes comes into play “only when doubt about a statute’s

application remains after the dominant rules of construction have been applied.”

Combs v. Chapal Zenray, 357 S.W.3d 751, 756 (Tex. App.—Austin 2011, pet.

denied). 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 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,

40

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. C). 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).

II. TEXAS’S MEMBERSHIP IN THE C OMPACT D OES NOT PRECLUDE THE

LEGISLATURE FROM R EQUIRING A TAXPAYER TO U SE THE GROSS-

RECEIPTS METHOD TO APPORTION MARGIN.

In the alternative, EMC 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 contract law and the Contracts Clause of the United

States Constitution. EMC Br. 11-15. Specifically, EMC 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

41

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.

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, EMC’s compact-related arguments fail.

42

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 EMC assigns to it.

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

Contrary to EMC’s assertions, EMC Br. 11-12, the mere fact that the

Compact is an “interstate compact” does not resolve whether the Compact

contractually obligates Texas to maintain 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

43

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.

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

binding contract.

EMC cites the Supreme Court’s U.S. Steel decision for its contention that

the Compact is a “valid and binding interstate compact.” EMC Br. 13

(emphasis added). But U.S. Steel does not support that proposition. Neither

the word “binding” 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 compact or 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

44

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

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

45

Planning Council, 786 F.2d 1359, 1363 (9th Cir. 1986). As the Michigan Court

of Claims recently concluded, the Compact does not exhibit any of these

characteristics. Ingram Micro, Inc. v. Dep’t of Treas., No. 11-000035-MT, slip

op. at 7-13 (Mich. Ct. Cl. Dec. 19, 2014) (App. D).

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).

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,”

46

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).

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

47

member States to exercise any powers they could not exercise in its absence.”

U.S. Steel, 434 U.S. at 473. Each member 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

“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).3

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

3. 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

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 the existence or non-

payment of those liabilities does not prevent or delay withdrawal. Id., art. X.2.

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

whether a compact affirmatively allows modification. 786 F.2d at 1363

(emphasis added).

49

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.879. And, as discussed

above, 11 more former and current Compact members (including Texas) have

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

50

Statement of Facts, Parts II.C, III. 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.

EMC argues that the Compact’s status as an “interstate compact” alone

means that it “is also a contract that cannot be amended, modified, or otherwise

altered without consent of all parties.” EMC Br. 12. But that begs the

question. “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 (emphasis added). Unlike other compacts, this Compact

does not provide that it supersedes conflicting state law, nor does it expressly

prohibit changes to the Compact’s text or application in a member state’s law.4

And, in any event, the Compact parties did consent to individual members

4. 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 . . . .”).

51

eliminating or restricting Article III.1’s “taxpayer option” by unanimously

adopting the 1972 Florida resolution. CR.879.

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 aims to “study” state tax systems, not “resolve” conflicts among

them; it “lack[s] formal enforcement mechanisms”; 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

52

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

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. MULTISTATE

TAX COMM’N, FIRST ANNUAL REPORT 12 (1969), available at http://www.mtc.

gov/uploadedFiles/Multistate_Tax_Commission/Resources/Archives/Annual

_Reports/FY67-68.pdf. 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 EMC 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,

53

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

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

54

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.

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

55

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. 51, n.4.

The Minnesota Tax Court, sitting en banc, recently reached a similar

conclusion regarding the Compact. Kimberly Clark Corp. v. Comm’r of

Revenue, No. 8670-R, slip op. (Minn. Tax Ct. June 19, 2015) (en banc) (App. E).

Assuming without deciding that the Compact was a binding contract, id. at 26,

the court held that nothing in the Compact “constitutes a clear and

unmistakable promise to refrain from using the State’s sovereign power to alter

the apportionment election provided by Articles III and IV,” id. at 40. The

court further relied on the Compact members’ course of performance in

determining that “the Compact could not reasonably be understood as

contractually requiring party states to refrain from using their sovereign

powers to alter the apportionment election.” Id. at 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.

Construing Article III.1 to preclude Texas from enacting an exclusive

apportionment method also would impermissibly conflict with the Texas

56

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

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.5 Yet EMC construes Article III.1 to effect such a

contractual suspension. Under EMC’s reasoning, Texas contracted away its

power to tax that portion of a taxpayer’s tax base that the taxpayer removes

5. 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.

57

from Texas’s taxing authority by electing Article IV’s income-apportionment

method over section 171.106’s exclusive apportionment method. Here, for

example, EMC claims a contractual right to withdraw part of its margin from

Texas’s taxing power to the tune of over $5 million 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).

Because EMC’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. As the

Minnesota Tax Court reasoned, “[c]onsidering that at least fourteen States have

constitutional provisions prohibiting them from contracting away their taxing

power, it is highly unlikely that the state tax officials and attorneys general who

drafted the Compact intended that party States would surrender their

sovereign authority to alter or repeal the apportionment election.” Kimberly

58

Clark Corp., No. 8670-R, slip. op. at 55; see also 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 EMC. 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. EMC 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.

By contrast, a non-approved compact like the Multistate Tax Compact

operates only as a state statute and, in some cases, a binding contract among

states. See 1A NORMAN J. SINGER & J.D. SHAMBIE SINGER, SUTHERLAND

59

STATUTES AND STATUTORY 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”).

EMC seems to suggest that a non-approved compact preempts other

state law simply by virtue of being an interstate agreement, independent of the

“binding force” of the Contracts Clauses. See EMC Br. 13. In support, EMC

60

relies primarily on West Virginia ex rel. Dyer v. Sims, 341 U.S. 22 (1951). But

that reliance is misplaced.

EMC misconstrues Dyer’s analysis as concerning conflicts between

compacts and later-enacted statutes. In Dyer, although the West Virginia

legislature had ratified an interstate compact, the State’s highest court had

invalidated that ratification on state common-law and constitutional grounds.

Id. at 26. On certiorari review, the Supreme Court confronted the antecedent

question whether it had jurisdiction to review a state supreme court judgment

based on a state-law determination. Id. at 28. In this context, the Court held

that it did:

It requires no elaborate argument to reject the suggestion that an

agreement solemnly entered into between States by those who

alone have political authority to speak for a State can be

unilaterally nullified, or given final meaning by an organ of one of

the contracting States. A State cannot be its own ultimate judge in

a controversy with a sister State. To determine the nature and

scope of obligations as between States, whether they arise through

the legislative means of compact or the federal common law

governing interstate controversies . . . is the function and duty of

the Supreme Court of the Nation.

Id. (citation and internal quotation marks omitted). In other words, the

Supreme Court distinguished between “those who alone have political authority

to speak for a State”—the legislature—and “an organ of one of the contracting

61

States”—e.g., a court—and held that the latter could not nullify or conclusively

construe an agreement adopted by the former. Id. The Court did not address

what happens when the same legislature that adopts a compact later enacts a

potentially conflicting statute, much less prescribe a rule that the statute is

automatically invalid.

Moreover, EMC ignores the Supreme Court’s later recognition that, in

light of Dyer’s statement that “all compacts” require congressional consent, id.

at 27, Dyer’s discussion is necessarily cabined to the subset of compacts that

actually require that consent under the Compact Clause. U.S. Steel, 434 U.S.

at 471 n.23.6 Because Congress has not consented to the Multistate Tax

Compact, EMC must rely on the Contracts Clauses to give the Compact

controlling effect over subsequent Texas law.

2. Section 171.106 does not unconstitutionally impair any

obligations to EMC 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

6. EMC likewise misplaces reliance on Hess v. Port Authority Trans-Hudson Corp., 513

U.S. 30 (1994). EMC Br. 12. Hess’s analysis concerns “compact[s] accorded congressional

consent.” 513 U.S. at 40-42.

62

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.

EMC cannot establish the first requirement because it is not a party to

the Compact. Nor is EMC 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).

But even if EMC 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,

63

431 U.S. 1, 21 (1977)). EMC could not have reasonably relied on Article III.1’s

taxpayer option because the Compact did not clearly and unmistakably obligate

its members to refrain from altering or eliminating that option. See supra Part

II.C; see also Kimberly Clark Corp., No. 8670-R, slip op. at 57 (holding that,

because there was no such obligation, Minnesota did not substantially impair

a contractual relationship under the Contracts Clause by repealing Articles III

and IV of the Compact). EMC also could not have reasonably expected that the

option would remain in place because the Compact permits states to withdraw

at will. See City of Charleston, 57 F.3d 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 EMC 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

apportionment formulas.” Moorman, 437 U.S. at 274. Texas once allowed

64

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. EMC waived the Contracts Clause issue.

EMC makes no effort to apply the Energy Reserves analysis. EMC Br.

14. Instead, EMC simply asserts that the Comptroller’s interpretation and

application of section 171.106 “impairs Texas’s contractual obligation to allow

taxpayers the three-factor apportionment formula election under the Multistate

Tax Compact.” Id. But merely identifying a breached contractual term does

not establish a Contracts Clause violation. As described above, the Supreme

Court has adopted a standard that requires more, confirming that “[t]he

65

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, EMC 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.).

III. EMC’ S A S -A PPLIED C ONSTITUTIONAL C HALLENGES A RE

JURISDICTIONALLY BARRED, WAIVED, AND MERITLESS.

In its final issue, EMC contends that section 171.106’s gross-receipts

apportionment method, as applied to its business, violates the Due Process and

Commerce Clauses of the United States Constitution and the Equal and

Uniform Taxation Clause of the Texas Constitution. EMC Br. 20-22. In

support, EMC argues that the gross-receipts method “attributes to Texas a

percentage of income that is disproportionate to the business EMC transacts

in Texas and leads to a grossly distorted result.” Id. at 21.

As a threshold matter, the district court lacked jurisdiction over those

challenges because EMC failed to raise them in its motion for rehearing before

the Comptroller. Among the jurisdictional prerequisites to a tax-refund suit,

a taxpayer must have filed a motion for rehearing that the Comptroller denied,

TEX. TAX CODE § 112.151(a)(2), and “[t]he grounds of error contained in the

66

motion for rehearing are the only issues that may be raised in [the] suit,” id.

§ 112.152(a). See Combs v. Chevron, Inc., 319 S.W.3d 836, 845 (Tex.

App.—Austin 2010, pet. denied) (describing this requirement as a “necessary”

“condition for trial-court jurisdiction”); see also In re Nestle USA, Inc., 359

S.W.3d 207, 211-12 (Tex. 2012) (Nestle I) (dismissing constitutional challenges

to the franchise tax for failure to comply with the administrative prerequisites

to suit in chapter 112 of the Tax Code).

EMC’s motion for rehearing listed a single ground of error: “Texas is

required to allow taxpayers to follow Article IV of the Multistate Tax Compact

since Texas was a member of the compact for the years at issue.” CR.8. The

motion elaborated that the Compact was binding on Texas, that Texas could not

deviate from the Compact’s terms without withdrawing from the Compact, and

that any law purporting to override the Compact would unconstitutionally

impair Texas’s contract obligations. CR.8-9. But the motion never mentioned

the Due Process, Commerce, or Equal and Uniform Taxation Clauses, and it

never complained that EMC’s use of the gross-receipts method resulted in a

disproportionate or grossly distorted tax burden. Id. Accordingly, EMC was

jurisdictionally barred from raising those issues in this suit.

67

Alternatively, the district court correctly granted summary judgment to

the Comptroller on these issues because EMC failed to plead them. A trial

court may not grant relief on a claim that was neither pleaded nor tried by

consent. In re Park Mem’l Condo. Ass’n, 322 S.W.3d 447, 450-51 (Tex.

App.—Houston [14th Dist.] 2010, no pet.) (citing TEX. R. CIV. P. 301); accord

Vincent v. Bank of Am., N.A., 109 S.W.3d 856, 863 (Tex. App.—Dallas 2003,

pet. denied) (“A party may not obtain a judgment based on a theory not pled.”).

EMC’s petition alleged only that the Compact contractually obligated

Texas to allow EMC to elect the Compact’s three-factor apportionment method.

CR.5-6. It did not mention the Due Process, Commerce, or Equal and Uniform

Taxation Clauses, and it did not assert that the gross-receipts method caused

EMC to suffer a disproportionate or grossly distorted tax burden. CR.4-7. Nor

were those issues tried by consent. When EMC included those issues in its

summary-judgment briefing, the Comptroller specifically objected that they

were outside the pleadings and asked the district court to disregard them.

CR.1133-34. Thus, if the Court does not dismiss these issues as jurisdictionally

barred, it should affirm the judgment for the Comptroller.

Finally, EMC’s arguments lack merit. As this Court has explained,

Texas’s gross-receipts apportionment method is presumptively valid under the

68

Due Process and Commerce Clauses. Gen. Dynamics, 919 S.W.2d at 868. To

meet its “heavy burden” to overcome that presumption, EMC was required to

show by “clear and cogent evidence” that the part of its margin apportioned to

Texas is “out of all appropriate proportion to the business transacted” here or

“has led to a grossly distorted result.” Id. (citations and internal quotation

marks omitted). And that showing must rest on a comparison of the

apportioned margin under EMC’s proposed formula to that actually

apportioned under the gross-receipts method. Id. at 868-69. Surveying

Supreme Court precedent on this issue, this Court has observed that the

Supreme Court “has only twice held the application of a single-factor formula

to be unconstitutional”—specifically, in cases where the challenged formula

increased the apportioned tax base by 162-205% (depending on the method

used) and 250%. Id. at 869. By contrast, the Supreme Court has upheld

apportionment formulas that increased the apportioned tax base within a range

of 14-93%. Id.

Here, the evidence showed that application of the gross-receipts method

rather than the Compact’s three-factor method increased EMC’s apportioned

margin within the range of 57.6-61.8% (depending on the year). CR.1135, 1143-

54. Because those increases fall well within the range of apportionment

69

differences upheld as constitutional by the Supreme Court, and well outside

those that the Court has found unconstitutional, EMC failed to show that, as

applied to its business, the gross-receipts method violates the Due Process or

Commerce Clauses.7

7. EMC offers no argument regarding the Equal and Uniform Taxation Clause. See EMC

Br. 20-22. And EMC’s discussion regarding the Due Process and Commerce Clauses does

not support an action under the Equal and Uniform Taxation Clause; the claims and

standards are different. See Nestle II, 387 S.W.3d at 618-26 (treating these as distinct

claims). Accordingly, EMC has waived any equal-and-uniform-taxation issue. See TEX. R.

APP. P. 38.1(i).

70

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 CHARLES K. ELDRED

Civil Litigation Assistant Attorney General

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

71

C ERTIFICATE OF C OMPLIANCE

According to WordPerfect 12, this brief contains 14,850 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 July 8, 2015, this Brief of Appellees was served by File & Serve

Xpress on:

Doug Sigel

RYAN LAW FIRM, LLP

100 Congress Avenue, Suite 950

Austin, Texas 78701

Doug.Sigel@RyanLawLLP.com

Lead Counsel for Appellant

/s/ Rance Craft

Rance Craft

72

APPENDIX

APPENDIX TABLE OF C ONTENTS

A. TEX. TAX CODE § 141.001

B. Addendum to Volume 1 of Florida Statutes, 1971

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

D. Ingram Micro, Inc. v. Dep’t of Treas., No. 11-000035-MT, slip op. (Mich.

Ct. Cl. Dec. 19, 2014)

E. Kimberly Clark Corp. v. Comm’r of Revenue, No. 8670-R, slip op. (Minn.

Tax Ct. June 19, 2015) (en banc)

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

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