holding that Maine's water’s edge combined reporting method provided a “taxing symmetry” for domestic and foreign commerce and that "the inclusion of dividends paid by foreign subsidiaries [did] not constitute the kind of facial discrimination against foreign commerce that caused the Supreme Court to invalidate Iowa's tax scheme in Kraft."
How later courts described this case
- holding that Maine's water’s edge combined reporting method provided a “taxing symmetry” for domestic and foreign commerce and that "the inclusion of dividends paid by foreign subsidiaries [did] not constitute the kind of facial discrimination against foreign commerce that caused the Supreme Court to invalidate Iowa's tax scheme in Kraft."
- holding that deduction of domestic, but not foreign, subsidiary dividends from parent’s income does not violate Foreign Commerce Clause because deduction provides “tax symmetry” where domestic subsidiary’s income is included in unitary combined income, while income of foreign subsidiary is not
- overruling a previous decision, Tambrands v. State Tax Assessor, 595 A2d 1039 AMENDED ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT TC 5413 Page 47 of 62 (Me 1991), which concluded that internal consistency test was violated when formula allowed no factor representation for foreign subsidiaries outside the water’s-edge reporting group that paid dividends to US taxpayer
- overruling a previous decision, Tambrands v. State Tax Assessor, 595 A2d 1039 ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT TC 5413 Page 43 of 58 (Me 1991), which concluded that internal consistency test was violated when formula allowed no factor representation for foreign subsidiaries outside the water’s-edge reporting group that paid dividends to US taxpayer
Written by the judges who cited it.
The opinion
CLIFFORD, Justice,
dissenting.
Because, in my view, the use of the Augusta formula does not comport with the unitary business concept on which Maine’s statutory income tax scheme is based, and is contrary to the United States Constitution, I respectfully dissent.
The Augusta formula is inconsistent with the unitary business concept on which Maine’s taxing scheme is based. Du Pont and its affiliates make up an integrated unitary business. 36 M.R.S.A. § 5102(10-A); see Tambrands, Inc. v. State Tax Assessor, 595 A.2d 1039 , 1040 n. 1 (Me.1991). Maine uses a “unitary business/formula apportionment method to determine the portion of the income of a corporation subject to taxation in more than one state or jurisdiction that is attributable to the corporation’s business activities in Maine. That Maine-attributable income is taxed as Maine income.” Id. at 1040-41 . The apportionment method is based on the Uniform Division of Income for Tax Purposes Act (UDITPA). Pursuant to the unitary business concept, dividends paid by a foreign affiliate of the unitary business, because the foreign affiliate is part of the “single business enterprise,” may be included, and properly so, in the income of the unitary business. Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425, 436-37 , 100 S.Ct. 1223, 1231-32 , 63 L.Ed.2d 510 (1980). The income of the unitary business is then apportioned to determine the amount subject to taxation by the taxing state. Id. at 438-39 , 100 S.Ct. at 1232-33 . The factors reflect accurately the business activity of a unitary business, and accordingly, the use of the three-factor apportionment formula has been approved for use by the states. Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 165 , 103 S.Ct. 2933, 2940 , 77 L.Ed.2d 545 (1983). Because the dividends from the foreign affiliate are included in the income of the unitary business to be apportioned, the apportionment formula should be consistent with the unitary business concept and reflect the factors attributable to the foreign affiliate by including at least a portion of the property, sales, and payroll of the foreign affiliate. This the Assessor’s apportionment formula fails to do. 1
[I]f the dividends are included in the ap-portionable base on the ground that the payor is a component of the taxpayer’s unitary business conducted in the state, the argument for excluding the payor’s factors appears to us to be weak. The *92 unitary concept should carry through to all aspects of the tax computation if it is the foundation for the inclusion of the dividends in the apportionable base of the tax.
J. Hellerstein & W. Hellerstein, State Taxation § 9.13(3)(b) (2d ed. 1993).
In Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425 , 100 S.Ct. 1223 , 63 L.Ed.2d 510 (1980), the issue of the noninclusion in the apportionment formula of the factors of Mobil’s foreign subsidiaries and affiliates was not raised at the administrative level and therefore the majority of the United States Supreme Court did not address the issue. In a separate dissenting opinion, however, Justice Stevens did speak directly to that issue:
Either Mobil’s worldwide petroleum enterprise ... is all part of one unitary business, or it is not; if it is, Vermont must evaluate the entire enterprise in a consistent manner....
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“Obviously, if the foreign source income is involved in the base for apportionment, foreign property, payroll and sales must be included in the apportionment factors.”
Mobil Oil Corp., 445 U.S. 425 , 461 & n. 16, 100 S.Ct. 1223 , 1243 & n. 16 (quoting Rudolph, State Taxation Of Interstate Business: The Unitary Business Concept And Affiliated Corporations, 25 Tax L.Rev. 191, 205 (1970)).
Maine has the authority to tax only the income of Du Pont that is earned in or attributable to the State of Maine. The Assessor’s formula taxes extra-territorial value. Even if the formula is not contrary to the commerce clause pursuant to the elusive internal consistency test, it violates the fairness principles of the due process clause. What we said in Tambrands is, in my view, equally applicable here:
The purpose of formula apportionment is to determine the amount of a unitary business that is attributable to Maine by comparing the business activities everywhere and apportioning the business income accordingly. Those business activities are measured from the property, sales and payroll of the unitary business, factors that have been held to be reliable indicators of business activity_ The Assessor, however, removes from the factors in the formula, and thus from the apportionment, the properly, payroll and sales figures that measure the business activity of the [f]or-eign [ajffiliate. The ineluctable result is that more of the business activity of the unitary business is attributable to Maine than is the actual case. Thus, the income taxable by Maine under the Assessor’s formula does not truly reflect ... Tambrands’ connection with Maine and fails to meet the test of fairness required by the due process clause....
Tambrands, 595 A.2d at 1044 (citations omitted).
Unless the sales, payroll and property values connected with the production of the income by the payor corporation are added to the denomination of the apportionment formula, the inclusion of earnings attributable to those corporations in the apportion tax base will inevitably cause ... [Du Pont’s Maine] income to be overstated.
Mobil Oil Corp., 445 U.S. at 460-61 , 100 S.Ct. at 1243 (Stevens, J., dissenting).
That the Assessor tests the tax computed against a formula that insures that the tax assessed will not exceed a theoretical tax computed under a completely different formula that, in my view, is not authorized in our tax laws, 2 does not cure the defect.
*93 Although in part for different reasons, I agree with the Superior Court’s decision that the Assessor’s formula should not be used, and I would affirm.
. Pursuant to the Augusta formula, the taxpayer’s taxable income is calculated under the Maine Water’s edge statute with dividends from the foreign subsidiaries included in income to be apportioned, but with factors of those foreign affiliates not included in the apportionment unless the taxable income so calculated exceeds the taxable income calculated if the worldwide reporting system were used.
. One of the legs of the Augusta formula, the so-called worldwide leg, against which the tax is tested uses a method of taxation not authorized by Maine's statutory income tax scheme. Maine utilizes a water’s edge combined reporting method of taxation. Title 36 M.R.S.A. § 5200 provides that the Maine income tax is imposed on Maine net income. Maine net income is federal taxable income apportioned to Maine. 36 M.R.S.A § 5102(8). Section 5244 in plain language prohibits “the income ... the property, payroll and sales of a corporation which is not required to file a federal income tax return ... [from being] included in the combined report.” Worldwide combined reporting apportions income for the entire unitary business, including all foreign affiliates, by the property, payroll, and sales of the entire unitary business. Because it apportions income from the entire unitary business and includes income of foreign affiliates, income that is not part of federal taxable income, the use of worldwide combined reporting is contrary to section 5244.