# EMC Corporation v. Glenn Hegar, Comptroller of Public Accounts of the State of Texas And Ken Paxton, Attorney General of the State of Texas > Texas Court of Appeals, 3rd District (Austin) · July 8, 2015 URL: https://www.frixlaw.com/law-library/cases/4069504 ## Case - **Court:** Texas Court of Appeals, 3rd District (Austin) - **Decided:** July 8, 2015 - **Precedential status:** Published - **Opinion:** Opinion - **Cited by:** 0 later opinions in the Frix Law Library ## Citator (automated) - No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases. - Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4069504 ## How later opinions describe it (automated extraction) - noting that states enact differing apportionment formulas “based on political and economic considerations that vary from State to State” ## Opinion text 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 4 [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4069504. Public record. Not legal advice.