Amicus Brief — Container Corp. of America v. Franchise Tax Bd.

Supreme Court of the United States

October Term, 1982

CONTAINER CORPORATION OF AMERICA,

Appellant,

v

FRANCHISE TAX BOARD,

Appellee.

On Appeal from the Court of Appeal

of the State of California

for the First Appellate District

BRIEF OF THE STATE OF NEW MEXICO AS

AMICUS CURIAE IN SUPPORT OF THE

FRANCHISE TAX BOARD

JEFF BINGAMAN

Attorney General of New Mexico

LISA GILLARD GMUCA

Assistant Attorney General

Counsel of Record

Post Office Box 630

Santa Fe, New Mexico 87509

(505) 988-2290

Counsel for Amicus Curiae

VERGARA PRINTING CO. - SANTA FE, NEW MEXICO

QUESTIONS PRESENTED

1. Whether standards exist for the determination whe-

ther foreign commerce is an issue in this case.

2. Whether foreign commerce is necessarily burdened

by the imposition of a fairly apportioned tax on the income of

a multinational unitary business.

3. Whether multiple burdens of taxation alone are

proscribed by the commerce clause.

4. Whether a broad national policy pre-emption stand-

ard is warranted in determining the validity of a state income

tax and whether, under such a broad standard, California’s

franchise tax is invalid.

TABLE OF CONTENTS

NO STANDARDS EXIST FOR THE DETER-

MINATION WHETHER FOREIGN COMMERCE

IS AN ISSUE IN THIS CASE .................

THE IMPOSITION OF A FAIRLY APPOR-

TIONED TAX ON THE INCOME OF A

MULTINATIONAL UNITARY BUSINESS

DOES NOT BURDEN FOREIGN COMMERCE ...

SHOULD THE COURT FIND THAT THIS

CASE PRESENTS A FOREIGN COMMERCE

QUESTION, JAPAN LINE SHOULD NOT BE

PRPs oc scot eccecececcsesvencesense

A. Multiple Burdens Alone Are Not Proscribed

By The Commerce Clause. ...............

B. Japan Line’s National Policy Pre-emption

Standard Is Overly Broad; Even Under

That Standard, However, California’s Tax

Is 65-64 6é.c0o seeks dkaeues

“ee ee ee ee eee ee

Sect eoenseeevaesgseeeseoeecewvegeseuese é€eee ee & ee

(Page(s)

TABLE OF AUTHORITIES

CASES: Page (s)

Alaska v. Arctic Maid,

ee eee eee enhae ad 5

Alessi v. Raybestos — Manhattan, Inc.,

ee Ws Ps 6 ose cd écwivececv¥ess tale aiakiel 18

Bass, Ratcliff & Gretton, Ltd. v.

State Tax Commission,

PE c6 pb beesteoesessvccce 2, passim

Boston Stock Exchange v. State Tax

Commission, 429 U.S. 318 (1977) .............2.06- 12

Butler Bros. v. McColgan,

Ss oie cee Sb eee whee Obed eee en 8

Central Grevhound Lines, Inc. v. Mealey,

EE fa ss whan 6c 4660060040869 8,13

Centrai R.R. Co. v. Pemnsylvania,

a wn wa wu eed bee eb ens 11

Chicago & North Western Transportation Co. v.

Kalo Brick & Tile Co., 450 U.S. 311 (1981)..... 16, 17

City of Philadelphia v. New Jersey,

EE 17

Complete Auto Transit, Inc. v. Brady,

es Ns osk 6066 ee 6% bhseses 5,9, 14, 15

Commonwealth Edison Co. v. Montana,

EE eee ee 5, passim

Davidson v. New Orleans,

eee ee we denl bone eee eked 14

Department of Revenue v. Washington

Stevedoring Cos., 435 U.S. 734 (1978). ............. 13

Dunbar-Stanley Studios, Inc. v. Alabama,

i a eee ae eee seebabees 5

East Ohio Gas Co. v. Tax Commission,

Re ere 6

Page(s)

Evco v. Jones,

GS Se en ee be wa deed wees beeen 1]

Exxon Corp. v. Governor of Maryland,

Se ee Be acs een eds deh used seeeecae 19, 20

Exxon Corp. v. Wisconsin Department of

Pee, GST GA. BF CEE ko cc cccvcsiccesccsss 12

Florida Lime & Avocado Growers, Inc. v.

— 6&4 Ne er Te 17

Frick v. Pennsylvania,

Teer eee re Te 14

Gibbons v. Ogden,

ee ee LD DED 6. o'6 6 0-c0dccnsnciéiane 14, 21

Hines v. Davidowitz,

ING 6 bee 044660 cabacdbnneceeeesee 17

J. D. Adams Manufacturing Co.

yp. Sdaven, SOS U.S. FBT CIGSS). . wc cccccccscess 11,12

Japan Line, Ltd. ». County of

Los Angeles, 441 U.S. 434 (1979). ........... 3, passim

Jones v. Rath Packing Co.,

i Ce és crs acbws cheeks backeaweeee 17

Lane County v. Oregon,

Pe es PP UN o Kh da withecescacaveuea 21

McCullock v. Maryland,

Se ee ee eG UOED 6 vb vtec ccccdcsvecécs 21

Michelin Tire Corp. v. Wages,

rere 15, 16, 18

Mobil Oil Corp. v. Commissioner

of Taxes, 445 U.S. 425 (1980) .............. 6, passim

Moorman Manufacturing Co. v. Bair,

a eT, be cacesecsseuasee 12, 13, 14, 21

New Motor Vehicle Board of California v.

Orrin W. Fox Co., 439 U.S. 96 (1978) .............. 19

Northwestern States Portland Cement Co. v.

Minnesota, 358 U.S. 450 (1959). .............0000- 12

Iv

Norton Co. v. Department of Revenue,

Pe, Cc 6 bc 6 he sdw dedwiesetereciceas 5

Oliver Iron Mining Co. v. Lord,

ee SS 6 bk 6-545 bb 0 44660500400 0aKe ON 6

Ott v. Mississippi Valley Barge Line Co.,

6 vce Gen eipaeeees vecdesnceky 11

Perez v. Campbell,

Se IE 6c ck dve busentdeasetwcnddaus 17

Spector Motor Service v. O'Connor,

NS «<6 onc CbEb Ab OO 666 Coe eeesennn 5

Standard Oil Co. v. Peck,

sc pcb Ceereeetieecdes baneeee 11

Standard Pressed Steel Co. v. Washington

Department of Revenue,

es ack ced dekheeeuasaeecaneuee 12

State Tax Commission v.

Interstate Natural Gas Co.,

er eee ree ary 6

Underwood Typewriter Co. v. Chamberlain,

ee SE nk Co cdb ékaceseheuceesd andes 8

Ward v. Maryland,

Fe es COS FS oct chee de cedeccccass 2!

Western Live Stock v. Bureau of

Revenue, 303 U.S. 250 (1938) ............... 5,11, 12

CONSTITUTION OF THE UNITED STATES

EES os cnc eccveeccceesseesneescess 2, passim

EAT TST ST TPT T TET CTT ET 2

ci discern bance sees sone need 15, 16

TREATISES AND LAW REVIEWS Page(s)

JEROME R. HELLERSTEIN AND

WALTER HELLERSTEIN,

STATE AND LOCAL TAXATION

GEE GE, TOFU occ ccccvccscccscesccscsesceccccs 12

Walter Hellerstein, State Income Taxation

of Multijurisdictional Corporations:

Reflections on Mobil, Exxon and

H. R. 5076, 79 MICH.L.REV. 113 (1980) ........... 20

Note, Constitutional Law — The Scope of the

Commerce Clause in International

Commerce, 55 WASH.L.REV. 885 (1979) ........... 10

LAURENCE H. TRIBE, AMERICAIy

CONSTITUTIONAL LAW (1978)... ........200005- 12

No. 81-523

IN THE

Supreme Court of the United States

October Term, 1982

CONTAINER CORPORATION OF AMERICA,

Appellant,

v.

FRANCHISE TAX BOARD,

Appellee.

On Appeal from the Court of Appeal

of the State of California

for the First Appellate District

BRIEF OF THE STATE OF NEW MEXICO AS

AMICUS CURIAE IN SUPPORT OF THE

FRANCHISE TAX BOARD

INTEREST OF THE STATE OF NEW MEXICO

Container Corporation of America challenges California’s

franchise tax, imposed under an apportionment formula which

is applied to Container’s worldwide operations, on due process

and commerce clause grounds. Container argues that Cali-

fornia’s tax misapportions income to domestic members of its

operations, thus overreaching, in violation of the due process

clause. Additionally, Container argues that California’s tax

results in multiple burdens of taxation, and that California’s

use of the apportionment method on its worldwide income

conflicts with the federal system of arms-length reporting,

thus preventing the federal government from speaking with

one voice in matters of foreign commerce. On these grounds

Container argues that the tax violates the commerce clause.

Container also argues that it does not conduct a unitary busi-

ness with its foreign subsidiaries.

New Mexico employs the unitary apportionment method of

determining the income of multijurisdictional corporations. It is

vitally interested in the Court’s resolution of the issues pre-

sented in this case. This brief is therefore submitted in support

of the Franchise Tax Board and the validity of California’s tax.

SUMMARY OF ARGUMENT

Container seeks to show that it does not conduct a unitary

business with its foreign subsidiaries. Although Container raises

this point at the end of its brief, the unitary question must be

addressed before California’s tax may be analyzed under the

due process and commerce clauses. This brief assumes a unitary

operation and a tax valid on due process grounds as a basis for

its discussion of the commerce clause issues raised by Container.

Container argues that California’s franchise tax, imposed on

its worldwide operations, violates the commerce clause because

it burdens foreign commerce. However, Container has not

shown that foreign commerce is an issue in this case. Applying

Bass, Ratcliff & Gretton, Ltd. v. State Tax Commission, 266

U.S. 271 (1924) and the accepted bases of the apportionment

method of determining income to the facts of this case, the

Court must find that foreign commerce is not burdened by the

3

imposition of a fairly apportioned tax ona multinational uni-

tary business.

Container asks the Court to invalidate California’s tax under

the two-part foreign commerce test established in Japan Line,

Ltd. v. County of Los Angeles, 441 U.S. 434 (1979). Japan Line

is not applicable to this case because, under the holding of Bass,

Ratcliff, foreign commerce is not an issue. However, even

should the Court find that foreign commerce is an issue here,

Japan Line should not be followed. Japan Line imposed a pro-

scription against multiple burdens of taxation when foreign

commerce is involved. However, multiple burdens of taxation

alone are not proscribed by the commerce clause. Japan Line

held that a state tax will be held invalid when it interferes with

the achievement of federal uniformity in the field of foreign

relations. The Court thus pre-empted a state tax on the basis

of general national policy. The national policy standard has

been rejected in pre-emption analysis. Additionally, even under

a broad pre-emption standard, Container cannot prevail in its

argument, because it has not shown the existence of a national

policy which governs state taxation of the income of multi-

jurisdictional corporations.

ARGUMENT

NO STANDARDS EXIST FOR THE

DETERMINATION WHETHER FOREIGN

COMMERCE IS AN ISSUE IN THIS CASE.

Container argues that imposition of California’s franchise

tax on an apportioned part of the combined income realized

from its worldwide operations burdens foreign commerce and

violates the commerce clause of the Constitution. (Brief of

Appellant at 21) Container urges the Court to appiy Japan Line,

4

Ltd. v. County of Los Angeles, 441 U.S. 434 (1979) and invali-

date California’s tax under the two-part test announced in that

case. !

It is necessary to the invocation of Japan Line that foreign

commerce be an issue in this case. Container contends that it is.

The basis of Container’s contention is unclear, however. Con-

tainer’s foreign commerce argument contains two threads: 1)

that California’s apportionment formula overreaches, misattri-

butes income and thus taxes foreign profits (Brief of Appellant

at 11, 21); and 2) that because multinational corporations may

be subject to multiple tax burdens and because there is a need

for federal uniformity in the area of foreign commerce, the

taxation of multinational corporations necessarily implies a

foreign commerce question. (Brief of Appellant at 21-39) Con-

tainer has tangled the threads of its argument and invites the

Court to invalidate combined reporting as applied to multi-

national businesses on foreign commerce grounds alone. (Brief

of Appellant at 37)

Logically, however, Container’s argument must be analyzed

in two stages. First, it must be determined whether California’s

apportionment formula, as applied to Container’s worldwide

business, overreaches. If the Court finds that it does, the tax is

invalid under the due process clause and there is no need to

reach the foreign commerce question. If it does not, the Court

must then address the question whether taxation of a multi-

national corporation under an acceptable apportionment

formula necessarily involves foreign commerce. Crucial to the

second determination is a knowledge of what constitutes for-

eign commerce for tax purposes. Although Container and its

amici make facile use of the term “‘foreign commerce,” there is

no indication that the term has a commonly accepted meaning.

1 The elements of the test are 1) whether the tax subjects foreign com-

merce to multiple tax burdens, and 2) whether the tax impairs ‘ederal

uniformity. Japan Line, 441 U.S. at 448.

When analyzing state taxes which are alleged to burden inter-

state commerce, there is no longer a need to quibble over what

does or does not amount to interstate commerce for tax

purposes.” In this Court’s decision in Complete Auto Transit,

Inc. v. Brady, 430 U.S. 274, 288-89 (1977), the rule, enunci-

ated in Spector Motor Service v. O'Connor, 340 U.S. 602

(1951), that certain aspects of interstate commerce were im-

mune from taxation was flatly rejected. The Court then adopted

the far more workable rule that a state could tax activities in

interstate commerce as long as its tax met certain criteria.

Because Japan Line imposed a separate commerce clause test

for analyzing taxes which are alleged to burden foreign com-

merce, the Court immunized foreign commerce from state tax-

ation in certain circumstances. Thus, in the area of foreign

commerce, Japan Line has brought us back to the same abstract

and difficult questions previously presented in interstate com-

merce analysis. Tax administrators, taxpayers and eventually

the courts must once again struggle to define foreign commerce

and to devise tests to separate purely foreign commerce from

the complicated system of local, interstate and foreign com-

merce in which modern business operates.?

2 See Commonwealth Edison Co. v. State of Montana, 453 U.S. 609,

614-15 (1981) and n. 3, infra.

3 Since it was thought that the commerce clause prohibited states from

directly taxing interstate commerce, it became necessary to distinguish

local from interstate commerce. See, e.g., Dunbar-Stanley Studios, Inc. v.

Alabama, 393 U.S. 537 (1969) (photography is local event, and so taxable,

although photographer is out-of-state corporation); Alaska v. Arctic Maid,

366 U.S. 199 (1961) (tax on freezer ships is tax on local activity, even

though fish are transported out-of-state after freezing); Norton Co. v.

Department of Revenue, 340 U.S. 534 (1951) (when sale can be attributed

to local business activities, gross receipts of out-of-state company are

taxable); Western Live Stock v. Bureau of Revenue, 303 U.S. 250 (1938)

(tax on sale of advertising space in magazine with interstate circulation is

(Cont. p. 6)

6

However, the Japan Line decision does not provide a defini-

tion of foreign commerce which may be applied to the facts of

this case. Because of the unique characteristics of the containers

taxed in Japan Line, the Court addressed the question of

whether foreign commerce was involved in one sentence:

“Appellants’ containers, however, are instrumentalities of for-

eign commerce, both as a matter of fact and as a matter of

law.” 441 U.S. at 445-46 (footnotes omitted). Perhaps it is

easier to identify “instrumentalities of foreign commerce,” id.,

than to determine generally what foreign commerce may be for

tax purposes. It is clear, however, that the issue of whether

taxation of multinational business presents the kind of foreign

commerce question the Court addressed in Japan Line is a

complex one, and one which has not been adequately addressed

by Container.

Subsequent to its decision in Japan Line that foreign com-

merce is to be treated differently from interstate commerce, id.

at 446, the Court has not provided guidance on when that

treatment will be afforded. In Mobil Oil Corp. v. Commissioner

of Taxes, 445 U.S. 425 (1980), the Court declined to apply

Japan Line to a case involving income taxes, stating that “the

3. (Cont. from p. 5)

permissible because preparing and printing advertising is local event);

Oliver Iron Mining Co. v. Lord, 262 U.S. 172 (1923) (mining is a local

activity, and so taxable despite fact that ore will be shipped out-of-state).

The distinction between local and interstate activities, difficult and some-

times arbitrary, leads to anomalous results. Compare, e.g., East Ohio Gas

Co. v. Tax Commission, 283 U.S. 465 (1931) (transmission of gas to Ohio

municipalities under low pressure is local business and so taxable) with

State Tax Commission v. Interstate Natural Gas Co., 284 U.S. 41 (1931)

(transmission of gas to distributors in Mississippi part of interstate com-

merce and so not taxable). Thus approach was finally found unworkable

in the area of interstate commerce. Commonwealth Edison Co. v. Mon-

tana, 453 U.S. 609 (1981). It may prove to be equally unworkable in the

area of foreign commerce.

7

factors favoring use of the allocation method in property taxa-

tion have no immediate applicability to an income tax.” /d. at

448. Thus, although the Court in Mobil did not offer guidance

on what foreign commerce is for state taxation purposes, its

opinion indicates that foreign commerce is not burdened by

the application of a fairly apportioned tax on unitary income.4

THE IMPOSITION OF A FAIRLY APPORTIONED

TAX ON THE INCOME OF A MULTINATIONAL

UNITARY BUSINESS DOES NOT BURDEN

FOREIGN COMMERCE.

Although it is unclear what foreign commerce is for tax pur-

poses, the holding of Bass, Ratcliff & Gretton, Ltd. v.State Tax

Commission, 266 U.S. 271 (1924)° indicates that this case does

not present a foreign commerce issue. In that case, a foreign

corporation contended that the application of New York’s

franchise tax to an apportioned share of the profits realized by

the corporation in conducting its unitary business imposed a

burden on foreign commerce and thus violated the commerce

clause. The Court found that where a corporation conducts a

unitary business both within and without the country, New

York could tax a proportionate share of the profits earned by

4 The Mobil Court cited Bass, Ratcliff & Gretton, Ltd. v. State Tax

Comm'n, 266 U.S. 271 (1924). 445 U.S. at 438.

5 Container seeks to characterize Bass, Ratcliff as so outmoded as to be

inapplicable. (Brief of Appellant at 8,n. 2) However, this Court in Mobil,

445 U.S. at 438, apparently found it was still viable, citing it as the “lead-

ing example” of the application of the rationale that “factors of profit-

ability arise from the operation of [a] business as a whole, [thus] it

becomes misleading to characterize the income of the business as having a

single identifiable ‘source,’ ” 445 U.S. at 438, to “businesses operating

both here and abroad.” /d.

8

the corporation without offending the commerce clause, as long

as the tax was “based upon the portion of such ascertained net

income determined by the proportion which the aggregate value

of specified classes of the assets of the corporation within the

State bears to the aggregate value of all such classes wherever

located.” Jd. at 278. The Court’s conclusion that New York’s

tax did not burden foreign commerce was based on the ac-

cepted principie that a proper method of apportionment,

applied to the combined income of a unitary business,

“* *reache[s], and [is] meant to reach, only the profits earned

within the [taxing] State.’ »© Id at 281 (quoting Underwood

Typewriter Co. v. Chamberlain, 254 U.S. 113, 121 (1920)).

Bass, Ratcliff is directly applicable to this case. Container’s

attempts to distinguish it (Brief of Appellant at 8, n. 2) are not

persuasive. Container first argues that Bass, Ratcliff is not con-

trolling because the corporation in that case did not operate

through subsidiaries, but rather through operating divisions.

This argument ignores the teaching of Mobil that the “form of

business organization may have nothing to do with the under-

lying unity or diversity of business enterprise.” 445 U.S. at

440. Second, Container argues that the taxpayer in Bass,

Ratcliff did not allege that New York’s apportionment formula

misattributed income and hence the case is inapposite. This

6 In the hysteria produced by the sanctity of forei;n profits the fact that

a proper apportionment formula will not reach them is overlooked. Yet

this Court has stated that a proper formula will “reflect ‘the relative con-

tribution of the activities in the various states to the production of the

total unitary income,’ so as to allocate to [the taxing state] its just propor-

tion of the profits earned by appellant from this unitary business.” Butler

Bros. v. McColgan, 315 U.S. 501, 509 (1942). The underlying premise of

the apportionment process is that it allows the taxing state to tax only

those profits which are attributable to it. Central Greyhound Lines, Inc.

v. Mealey, 334 U.S. 653 (1948).

9

argument reflects the confusing approach Container takes in

this case.’ Container’s allegation of misattribution of income is

pertinent to this Court’s determination of first, whether Con-

tainer is a unitary business and second, whether California’s

apportionment formula adequately determines Container’s

California income. If the Court answers these two questions in

the affirmative, Bass, Ratcliff is directly applicable to the next

issue before the Court: whether application of an acceptable

apportionment formula to a multinational unitary business

burdens foreign commerce. Bass, Ratcliff’s unequivocal answer

is that it does not. Therefore, should the Court find that Cali-

fornia’s apportionment formula meets due process standards,

the Court should find that Bass, Ratcliff is controlling and

foreign commerce is not burdened in this case. To apply Japan

Line and its foreign commerce test would necessitate overruling

Bass, Ratcliff and the cases which follow it.

SHOULD THE COURT FIND THAT THIS CASE

PRESENTS A FOREIGN COMMERCE QUESTION,

JAPAN LINE SHOULD NOT BE FOLLOWED.

In Japan Line the Court held that where foreign commerce

was at issue, a challenged tax must meet two tests in addition to

those impcesed by Complete Auto Transit. These tests are 1)

whether the tax subjects foreign commerce to multiple tax bur-

dens, and 2) whether the tax prevents the federal government

from speaking with one voice in its relations with foreign

nations. The multiple burdens test is not compelled by the

Constitution. The broad pre-emption standard developed under

the federal uniformity test is not warranted under the suprem-

acy clause. Container does not show that California’s tax is

pre-empted even under the broad standard imposed. For these

reasons the Japan Line tests should not be applied in this case.

7 See Part 1, supra.

10

A. Multiple Burdens Alone Are Not Proscribed

By The Commerce Clause.

The first part of the extended foreign commerce test estab-

lished in Japan Line is that the questioned tax must not subject

foreign commerce to multiple burdens of taxation. The Court in

Japan Line introduced its multiple burden test with the state-

ment that “‘[i]t is a commonplace of constitutional jurispru-

dence that multiple taxation may well be offensive to the

Commerce Clause.” 441 U.S. at 446. The Court cited the

“enhanced risk” of multiple burdens in the area of foreign

commerce as the basis for imposition of this test.* Jd. However,

multiple burdens of taxation without more are not proscribed

by the commerce clause.? While the term “multiple burdens”

is often used to call into question the constitutionality of state

taxing schemes, the doctrine underlying ihe term is complex

8 One commentator suggests that the Court’s decision to develop a differ-

ent standard for foreign commerce questions was based on an attempt to

apply a doctrine of interstate commerce which prohibits states from

imposing undue burdens on commerce, to international commerce, an

application which cannot logically be made. The Court in Japan Line

reasoned that because Japan taxed the containers in full, California’s

tax was prohibited. However, the commentator argues, the only com-

merce clause inquiry the Court in Japan Line need have made was whether

California’s tax burdened commerce. Japan’s imposition of a tax was

irrelevant to this inquiry as was the Court’s inability to require that

Japan’s tax be apportioned. Note, Constitutional Law — The Scope of

the Commerce Clause in International Commerce, 55 WASH.L.REV.

885, 892 (1979); see Mobil: “[1}t [Mobil’s argument] attempts to focus

attention on the effect of foreign taxation when the effect of domestic

taxation is the only real issue.” 445 U.S. at 447. If the Court’s inquiry

under the commerce clause is limited to whether a state tax has unduly

burdened commerce, a separate foreign commerce test is unnecessary.

9 None of the cases cited by the Court in support of its statement that

multiple taxation may offend the commerce clause held that multiple

burdens alone are forbidden. Rather multiple burdens which resulted in

(Cont. p. 11)

1]

and embodies two important aspects of commerce clause

analysis, ie., that taxes which impose discriminatory multiple

burdens on interstate commerce are forbidden, and that taxes

imposed upon interstate commerce must be fairly apportioned.

The origins of the multiple burden test in commerce clause

analysis may be found in Western Live Stock v. Bureau of Rev-

enue, 303 U.S. 250 (1938). That case announced that multiple

taxation, while not in itself unconstitutional, could violate the

commerce clause if it resulted in a cumulative tax burden which

discriminated against interstate commerce. Other cases have

also indicated that multiple taxation is repugnant to the com-

merce clause only when it causes interstate commerce to bear a

greater tax burden than local commerce. See Evco vy. Jones,

409 U.S. 91, 94 (1972); Standard Oil Co. v. Peck, 342 U.S. 382,

384-85 (1952); Ort v. Mississippi Valley Barge Line Co., 336

9. (Cont. from p. 10)

discrimination against interstate commerce were found invalid under

the clause, as were taxes which were not fairly apportioned. Evco v.

Jones, 409 U.S. 91, 94 (1972) (tax invalidated because it subjected inter-

state commerce to risks of a double tax burden to which intrastate com-

merce was not exposed); Central R.R. Co. v. Pennsylvania, 370 U.S. 607,

614 (1962) (tax by domiciliary state of full value of rolling stock invalid

where other states could apply apportioned taxes); Standard Oil Co. v.

Peck, 342 U.S. 382, 384-85 (1952) (tax invalidated because it imposed

multiple burdens on vessels engaged only in interstate commerce); Ort

v. Mississippi Valley Barge Line Co., 336 U.S. 169, 174 (1949) (tax valid

because “[it] has no cumulative effect caused by the interstate character

of the business . . . [and] seems therefore to square with our decisions

holding that interstate commerce can be made to pay its way by bearing

a nondiscriminatory share of the tax burden which each State may impose

on the activities or property within its borders.”); J. D. Adams Manu-

facturing Co. v. Storen, 304 U.S. 307, 311 (1938) (tax invalid because

it would subject interstate commerce “to the risk of a double tax burden

to which intrastate commerce is not exposed.”) None of these cases

invalidated an apportioned tax imposed by a jurisdiction with an appro-

priate claim to tax.

12

U.S. 169, 174 (1949); J. D. Adams Manufacturing Co. v.

Storen, 304 U.S. 307, 311 (1938). This Court has stated that

the fundamental principle to be applied in commerce clause

analysis is: “No State, consistent with the Commerce Clause,

may ‘impose a tax which discriminates against interstate

commerce. . . .” [citations omitted]. The prohibition against

discriminatory treatment of interstate commerce follows

inexorably from the basic purpose of the Clause.” Boston

Stock Exchange v. State Tax Commission, 429 U.S. 318, 329

(1977) (quoting Northwestern States Portland Cement Co.

v. Minnesota, 358 U.S. 450, 458 (1959)).

The broadening of the states’ power to tax interstate com-

merce, announced in Western Live Stock and the cases which

followed it, was accompanied by the requirement that a tax

imposed by a state be apportioned by methods which reflected

the state’s connection with the object of taxation.!9 Because

the commerce clause prohibits multiple burdens of taxation

which fal) only on interstate commerce, and because more

than one jurisdiction may have the right to tax interstate com-

merce, apportionment became essential to validation of a

state tax under the commerce clause.!! Where a tax is fairly

apportioned there can be no multiple tax burden. Japan Line,

441 U.S. at 447-48; see Mobil; Exxon Corp. v. Wisconsin

Departinent of Revenue, 447 U.S. 207 (1980); Standard Pressed

Steel Co. v. Washington Department of Revenue, 419 U.S. 560

(1975). In the absence of a showing that a challenged tax is not

properly apportioned, a multiple burdens claim may not suc-

cessfully be made. See Moorman Manufacturing Co. v. Bair,

437 U.S. 267 (1978).

10 The multiple burdens doctrine is linked with jurisdictional analysis

under the commerce clause. See LAURENCE H. TRIBE, AMERICAN

CONSTITUTIONAL LAW 86-17, at 361 (1978).

11 See JEROME R. HELLERSTEIN AND WALTER HELLERSTEIN,

STATE AND LOCAL TAXATION 243 (4th ed. 1978).

13

The pertinent question in multiple burden cases is not

whether one or more jurisdictions are taxing the same income,

property or activity but rather whether the state in question is

exacting a fair demand for the aspect of interstate commerce to

which it bears a relation. See Department of Revenue v. Wash-

ington Stevedoring Cos., 435 U.S. 734 (1978); Central Grey-

hound Lines, Inc. v. Mealey, 334 U.S. 653 (1948). The fact that

two jurisdictions are imposing a tax on the same prope:ty or

activity is not a sufficient basis for invalidation of a tax on com-

merce clause grounds. 12 If California’s tax is found to be fairly

apportioned and treats domestic, interstate and foreign com-

merce with an even hand, the imposition of a tax by other

jurisdictions is not relevant to the validity of California’s tax

under the commerce clause.

Container’s multiple burden theory is flawed in two signifi-

cant respects. First, had California imposed a gross receipts tax

instead of an income tax on Container’s California operations

the economic effect on Container would have been the same,

yet Container would have no basis for complaint under its

multiple burdens theory. See Moorman, 437 U.S. at 280.

Under this theory it is the imposition of an “jmcome”’ tax by

more than one jurisdiction which invalidates the tax. It would

be an exercise in formalism to find a tax invalid on the basis

12 The Court in Moorman addressed the question whether lowa’s corpo-

rate income tax should be held invalid because, together with Illinois’ tax,

it allegedly subjected interstate commerce to multiple tax burdens. The

Court stated that:

[W]hatever disparity [in treatment of local and foreign corpora-

tions] may have existed is .ut attributable to the Iowa statute.

It treats both local and foreign concerns with an even hand; the

alleged disparity can only be the consequence of the combined

effect of the lowa and Illinois statutes, and lowa is not respon-

sible for the latter.

437 US. at 277, n. 12.

14

of speculative concerns with multiple taxation if the same tax,

but with a different name, would be valid under the commerce

clause.!3 J.

Second, multiple taxation on the total value of property or

on income is constitutionally valid when the taxes are imposed

by jurisdictions with concurrent rights to tax. Concurrent

federal and state taxation of income is a well-established norm.

Mobil, 445 U.S. at 448. Death taxes on the same estate can be

imposed by both the state and federal governments. Frick v.

Pennsylvania, 268 U.S 473 (1925). The Constitution does not

prohibit taxation of real estate by two concurrent jurisdictions.

See Davidson v. New Orleans, 96 U.S. 97 (1878). The allowance

of multiple taxation by jurisdictions with concurrent rights to

tax is based on the fact, long recognized by this Court, that the

power to tax is a fundamental attribute of sovereignty. Gibbons

v. Ogden, 22 U.S. (9 Wheat.) 1, 198-99 (1824). In this case

California and the federal government have concurrent rights

to tax Container’s income. Presumably, California also enjoys

such a concurrent right with foreign jurisdictions with rights

to tax parallel to those of federal government. Yet Container

argues that because another jurisdiction also imposes a tax on

its income, California’s tax must be held invalid. Container’s

argument is not persuasive in light of the case law cited above.

It is only when a challenged tax discriminates against com-

merce or is not fairly apportioned that a valid multiple burden

claim may be made under the commerce clause. The Complete

13 It would be an equally formalistic approach to find California’s tax

invalid merely because another jurisdiction is also imposing an income

tax where no facts about the nature or level of that tax are alleged or

proved. Yet, in Japan Line the fact that Japan imposed a “property” tax

was sufficient to call into question the validity of the county’s tax. Facts

about the actual nature, the level or the incidence of that tax were not

required. 441 U.S. at 452,n. 17.

15

Auto Transit test incorporates these two requirements. 430

U.S. at 277-78. The Court in Japan Line held that the county’s

tax met these two tests, finding that the tax was not discnmi-

natory and was fairly apportioned. 441 U.S. at 445. An addi-

tional proscription against multiple burdens alone in the area of

foreign commerce is not compelled by the commerce clause.

The imposition of the Japan Line multiple burdens test will

preclude state taxation whenever a foreign jurisdiction imposes,

or has the right to impose, a tax.'4 This result contravenes

principles of federalism and ignores the states’ sovereign right

to tax. For these reasons the test should not be imposed in this

case.

B. Japan Line’s National Policy Pre-emption Standard

Is Overly Broad; Evea Under That Standard,

However, California’s Tax Is Not Pre-empted.

The second part of the foreign commerce test announced in

Japan Line requires that a state tax be held invalid under the

commerce clause if it prevents the federal government from

speaking with one voice in matters of foreign commerce. The

Japan Line Court cited the principle it established in Michelin

Tire Corp. v. Wages, 423 U.S. 276, 285 (1976): “ ‘[T]he

Federal Government must speak with one voice when regulating

commercial relations with foreign governments,’ ’’ 441 U.S. at

449, noting that “[t]he policies animating the Import-Export

14 The Court in Japan Line adopted an allocation approach and suggested

that the mere possibility of multiple taxation will preclude a state tax.

441 U.S. at 446. In effect this approach is remarkably similar to that

reached under the home port doctrine under which only the home port

was allowed to tax a vessel engaged in interstate commerce. But the

Court in Japan Line noted that the home port doctrine “has yielded to

a rule of fair apportionment,” 441 U.S. at 442, and “can claim no un-

equivocal constitutional source.” /d. at 443.

16

Clause [under which Michelin was decided] and the Commerce

Clause are much the same.”!> /d. at 449, n. 14.

Although not so demonimated, the one-voice test is essen-

tially a pre-emption test. Under traditional pre-emption analysis

“[p]re-emption of state law by federal statute or regulation is

not favored ‘in the absence of persuasive reasons — either that

the nature of the regulated subject matter permits no other con-

clusion, or that Congress has unmistakenly so ordained.’ ”

Commonwealth Edison Co. v. Montana, 453 U.S. 609, 634

(1981) (quoting Chicago & North Western Transportation Co.

v. Kalo Brick & Tile Co., 450 U.S. 311, 317 (1981) ). Whether

15 Although the Court cited Michelin with approval it did so without

adopting the rationale or holding in that case. In Michelin an ad valorem

tax was imposed on imported tires stored in a warchouse. Michelin claimed

that imposition of the tax violated the import-export clause. The Court in

Michelin found no violation of the clause, emphasizing the nondiscrimina-

tory nature of the tax. The Court stated:

It is obvious that such nondiscriminatory property taxation

can have no impact whatsoever on the Federal Government’s

exclusive regulation of foreign commerce, probably the most

important purpose of the Clause’s prohibition. By definition,

such a tax does not fall on imports as such because of their place

of origin. It cannot be used to create special protective tariffs or

particular preferences for certain domestic goods, and it cannot

be applied selectively to encourage or discourage any importation

in a manner inconsistent with federal regulation.

423 US. at 286. The reasoning applied under the import-export clause in

Michelin may be applied to commerce clause questions as well. 441 U.S. at

449, n. 14. The Japan Line tax met the requirements of Michelin: it was

“nondiscriminatory”; it did not fall on instrumentalities of foreign com-

merce because of “their place of origin’’; it could not be used to protect

domestic instrumentalities; and it could not “be applied selectively to

encourage or discourage” commerce. 423 U.S. at 286. Yet, while the

Court found the Michelin tax valid, it invalidated the county’s tax in Japan

Line.

17

a state law has been pre-empted by federal laws or treaties

touching the same subject depends upon whether the state

law “‘stands as an obstacle to the accomplishment and execution

of the full purposes and objectives of Congress.” Hines vy.

Davidowitz, 312 U.S. 52, 67 (1941). A state law may be found

to have been pre-empted either because of an actual conflict

between the state and federal statutes or regulations, or by

evidence of a congressional design to pre-empt the field. Florida

Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132 (1963).

Deciding whether a state statute is invalid under the supremacy

clause because it conflicts with federal law “ ‘is essentially a

two-step process of first ascertaining the construction of the

two statutes and then determining the constitutional question

whether they are in conflict.’ ”’ Chicago & North Western Trans-

portation Co. v. Kalo Brick & Tile Co., 450 U.S. at 317 (quot-

ing Perez v. Campbell, 402 U.S. 637, 644 (1971)). This conflict

can be found either in provisions contradictory on their face or

from a conflict between the state statute and the objectives

underlying the federal enactment. See Jones v. Rath Packing

Co., 430 U.S. 519 (1977). When no actual conflict exists, state

law must yield only when the nature of the subjeci matter or an

explicit declaration of congressional design to displace state

law so requires, and federal occupation of a field will not be

lightly inferred. See Florida Lime & Avocado Growers. Absent

federal legislation a state may impose a system of taxation as

long as that system is “within the restraints imposed by the

Commerce Clause itself.” City of Philadelphia v. New Jersey,

437 U.S. 617, 623 (1978).

Applying traditional pre-emption analysis to this case,

California’s tax is not pre-empted. There is no specific federal

statute with which the tax conflicts and there is no evidence

of Congressional intent to pre-empt the field, as indeed there

could not be.

18

The pre-emption test developed in Japan Line, to be applied

when foreign commerce is at issue, requires that state taxation

be pre-empted if it interferes with the “achievement of federal

uniformity,” 441 U.S. at 450, in what is “pre-eminently a

matter of national concern.”!© /d. at 448. The broad test enun-

ciated by the Japan Line Court would pre-empt a state tax on

the basis of a general national policy. /d. at 453. The Japan Line

Court found a national policy to remove impediments on the

use of containers in international traffic, and that the county’s

tax interfered with this policy. /d. It found this policy reflected

in the Customs Convention on Containers and thus could have

found pre-emption of the tax under traditional pre-emption

doctrine. Instead it invalidated the tax on broad grounds,

stating that “it [the tax] prevent[ed] the Federal Government

from ‘speaking with one voice’ in international trade.” /d. at

453. By finding a general national policy sufticient to pre-empt

the county’s tax Japan Line departs from other decisions of the

Court in which the “national policy” pre-emption standard for

finding a conflict between federal and state law was rejected.

The “national policy” pre-emption standard established in

Japan Line is overly broad. The pre-emption determination

must be “guided by respect for the separate spheres of govern-

mental authority preserved in our federalist system.” Alessi v.

Raybestos — Manhattan, Inc., 451 U.S. 504, 522 (1981). The

Japan Line standard disregards the resulting canon that federal

supremacy is not lightly presumed, Alessi, 451 U.S. at 522, by

allowing federal pre-emption to be inferred in the absence of

“persuasive reasons” of the sort previously required by the

Court to invalidate state laws. Because of the importance of

16 While cases cited by the Court support the idea that uniform treatment

of foreign nations is necessary, the Michelin Court found that a fairly

apportioned non-discriminatory tax would not impair such treatment. 423

US. at 286. See n. 15, supra.

19

maintaining the state’s power to act in its sphere of authority,

the national policy standard has been rejected by the Court in

traditional pre-emption analysis, regardless of conflict between

state law and a general national policy. Commonwealth Edison,

453 U.S. at 633-34; Exxon Corp. v. Governor of Maryland,

437 U.S. 117, 133 (1978); New Motor Vehicle Board of Cali-

fornia v. Orrin W. Fox Co., 439 U.S. 96, 111 (1978). Even in

Commonwealth Edison, decided after Japcn Line, the Court

stated that it must “look beyond general expressions of ‘na-

tional policy’ to specific federal statutes with which the state

law is claimed to conflict.”” /d. at 634 (footnote omitted).

In that case the Court agreed that a national policy existed to

encourage the use of coal and other alternative fuels instead of

petroleum products and natural gas. However, the Court refused

to find that this general policy was evidence of a Congressional

intent to pre-empt any state regulation which might have an

adverse impact on the use of coal. /d. Similarly, in Exxon Corp.

v. Governor of Maryland the Court refused to invalidate a state

law which regulated the retail distribution of gasoline even

though the law was in conflict with the “basic national policy

favoring free competion” which was embodied in the Sherman

Act. 437 U.S. at 133. Under the rulings of Commonwealth

Edison and Exxon Corp. v. Governor of Maryland, the existence

of a national policy favoring arms-length reporting is not suf-

ficient to pre-empt California’s tax, absent a specific federal

statutory mandate.

However, even under the broad test announced in Japan Line

California’s tax would not be pre-empted because Container has

not shown the existence of even a general national policy with

respect to state taxation of multinational corporations. Con-

tainer argues that California’s imposition of a tax determined

by apportionment of its multinational income interferes with a

federal policy favoring the use of arms-length reporting. This

federal policy, Container argues, may be drawn from regulations

20

promulgated under the Internal Revenue Code and various tax

treaties which embody federal schemes for taxing income of

multinational corporations. (Brief of Appellant at 29-31)

Container cites no specific Congressional action which requires

the states to employ arms-length reporting!” but argues that

Congressional intent to pre-empt California’s apportioned tax

may be inferred from the federal policy. Case law dictates

that this inference not be made.

In addition to stating its general reluctance to infer pre-

emption, Exxon Corp. v. Governor of Maryland, 437 U.S. at

132, the Court has specifically stated that absent an “explicit

directive from Congress, [the Court] cannot infer that treat-

ment of foreign income at the federal level mandates identical

treatment by the States,” Mobil, 445 U.S. at 448, because of

the “well-established norm” of “[c]oncurrent federal and

state taxation.” /d. The federal regulations and treaties pro-

viding for federal taxation of multinational corporations

cited by Container are not germane to the issue of state income

taxation. Cf Mobil, 445 U.S. at 448. Congress has not issued a

directive on the states’ power to tax multijurisdictional corpo-

rations. This “is attested by the fact that Congress has long

debated, but has not enacted, legislation designed to regulate

state taxation of income.” /d. The constitutional taxing sys-

tem, principles of federalism, !® the states’ sovereign right to

17 Congress has not taken such a position. See Mobil, 445 U.S. at 448.

18 See Walter Hellerstein, State Income Taxation of Multijurisdictional

Corporations: Reflections on Mobil, Exxon and H.R. 5076, 79 MICH.L.

REV. 113, 170-71 (1980).

21

tax !9 and case law preclude a finding that the mere existence of

a federal policy for federal taxation of multinational corpora-

tions pre-empts state taxing schemes.

Container cites Moorman, 437 U.S. at 280, in support of

its federal uniformity argument, stating that “the freedom of

the States to formulate independent policy in [the] area [of

commerce] may have to yield to an overriding national interest

in uniformity.” (Brief of Appellant at 38) While this quote

from Moorman is accurate, it is incomplete. The portion omit-

ted by Container makes it clear that this freedom may only

yield when Congress enacts “‘legislation requiring all States

to adhere to uniform rules for the division of income.” 437

U.S. at 280. Moorman clearly holds that “[i]t is to that body

{Congress}, and not this Court, that the Constitution has

committed such policy decisions.”2° Jd.; Accord Common-

19 The power to tax is a fundamental attribute of sovereignty , Gibbons v.

Ogden, 22 U.S. (9 Wheat.) 1 (1824), is “retained by the states. . . [and]

is not abridged by the grant of a similar power to the government of the

Union. . . [and] is to be concurrently exercised by the two govern-

ments. . .” McCullock v. Maryland, 17 U.S. (4 Wheat.) 316,425 (1819);

accord Ward v. Maryland, 79 U.S. (12 Wall.) 418 (1870); Lane County v.

Oregon, 74 U.S. (7 Wall.) 71 (1869).

20 The entire quote from Moorman reads:

While the freedom of the States to formulate independent

policy in this area may have to yield to an overriding national

interest in uniformity, the content of any uniform rules to which

they must subscribe should be determined only after due consid-

eration is given to the interests of all affected States. It is clear

that the legislative power granted to Congress by the Commerce

Clause of the Constitution would amply justify the enactment of

legislation requiring all States to adhere to uniform rules for the

division of income. It is to that body, and not this Court, that the

Constitution has committed such policy decisions.

437 US. at 280.

22

wealth Edison, 453 U.S. at 628. Congress has not acted. Mobil,

445 US. at 448. Therefore, California’s tax must stand.

Respectfully submitted,

JEFF BINGAMAN

Attorney General of New Mexico

LISA GILLARD GMUCA

Assistant Attorney General

Post Office Box 630

Santa Fe, New Mexico 87509

(505) 988-2290

23

CERTIFICATE OF SERVICE

I hereby certify that on the 13th day of October, 1982, I,

Lisa Gillard Gmuca, a member of the bar of the Supreme

Court, caused to be mailed, postage prepaid, three copies

of the foregoing Brief of the State of New Mexico as Amicus

Curiae in Support of the Franchise Tax Board to Franklin C.

Latcham, Counsel for Appellant, One Market Plaza, Spear

Street Tower, San Francisco, California 94105 and to George

Deukmejiian, Attorney General, and Neal J. Gobar, Deputy

Attorney General, Counsel for Appellee, at 110 West A Street,

Suite 700, San Diego, California 92101. I further certify that

all parties required to be served have been served.

LISA GILLARD GMUCA

Assistant Attorney General