# Appendix — Atlantic Richfield Co. v. Alaska > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385017_0286%3A2 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1986 - **Citation:** 474 U.S. 1043 ## Text Supreme Court, U.S, FILED Ow" * NOV 13 1968 __} JOSEPH K. SPANIOL, Ji CLERK a er October Term, 1985 ATLANTIC RICHFIELD COMPANY; ARCO PIPE LINE COMPANY; EXXON CORPORATION; EXXON PIPELINE COMPANY; BP ALASKA, INC.; SOHIO ALASKA PETRO- LEUM COMPANY; and SOHIO PIPE LINE COMPANY, Appellants, VS. STATE OF ALASKA, ef al., Appellees. On Appeal From the Supreme Court of Alaska APPENDIX TO JURISDICTIONAL STATEMENT WILLIAM B. ROZELL JOHN F. DaumM* JOHN F. CLouau, III BARTON H. THOMPSON FAULKNER, BANFIELD, RICHARD B. GOETZ DOooOGAN & HOLMES O'MELVENY & MYERS 302 Gold Street 400 South Hope Street Juneau, Alaska 99801 Los Angeles, CA 90071 and (213) 669-6000 J. W. BULLION Counsel for Appellants Exxon RALPH I. MILLER Corporation and Exxon THOMPSON & KNIGHT Pipeline Company 3300 First City Center TERRENCE G. PERRIS Dallas, Texas 75201 WILLIAM H. Lutz HOWARD J. C. NICOLS SQUIRE, SANDERS & DEMPSEY 1800 Huntington Building Cleveland, Ohio 44115 Counsel for Appellants Sohio Alaska Petroleum Company, BP Alaska, Inc.; and Sohie Pipe Line Company Counsel for Appellants Atlantic Richfield Company and Arco Pipe Line Company *Counsel of Reeord twhaw —X—e err a a eS er . en BARRY L. WERTZ JANICE L. ROBERTSON EXXON CoMPANY, U.S.A. 800 Bell Avenue Houston, Texas 77002 and HARTIG, RHODES, NORMAN, MAHONEY & EDWARDS ROBERT J. MAHONEY 717 “K” Street Anchorage, Alaska 99501 Counsel for Appellants Exxon Corporation and Exxon Pipeline Company RICHARD H. HAHN THE STANDARD OIL COMPANY 1725 Midland Bldg. Cleveland, Ohio 44115 Counsel for Appellants Sohio Alaska Petroleum Company, BP Alaska Inc., and Sohio Pipe Line Company, ROBERT E. MCMANUS ATLANTIC RICHFIELD COMPANY P.O. Box 2819 Dallas, Texas 75221 Counsel for Appellants Atlantic Richfield Company and Arco Pipe Line Company A. TABLE OF CONTENTS COPIES OF THE DECISION APPEALED FROM I. Opinion of the Supreme Court of Alaska, dated August 16, 1985, affirming the judg- ment of the court below ............... Il. Memorandum of Decision and Order Granting Summary Judgment of the Superior Court of the State of Alaska, Third Judicial District, dated May 27, CR ae ee es Poe ee ae eee Ill. Order for Final Judgment of the Superior Court of the State of Alaska, Third Judi- eiai District, dated July 6, 1983 and effee- og ee ee IV. Judgment of the Superior Court of the State of Alaska, Third Judicial District, Gate GAT ORO hv kc iawn cape ciun sae NOTICE OF APPEAL, FILED NOVEMBER RELEVANT CONSTITUTIONAL PROVI- SIONS, STATUTES, AND REGULATIONS . AFFIDAVIT OF SIDNEY DAVIDSON, Filed SE ie ea a he ee ee eS Sidney Davidson is Arthur Young Professor of Aceounting at the University of Chicago and former Dean of the Graduate School of Busi- ness. His affidavit shows that generally accepted accounting principles provide no sup- port for the Oil Tax Act, and that the effect of the Act is to diseriminate against interstate commerce. Page 45a 4sa 48a 49a 53a 150a il AFFIDAVIT OF PETER MIESZKOWSKI, Filed July 30, 1982................00.000.. Peter Mieszkowski is Cline Professorrof Eeo- nomics and Finance at Rice University. His affidavit shows that Alaska’s tax policies are not constrained by ordinary political and eco- nomie considerations, and that Alaska’s expen- diture levels are consequently disproportionate to those of all other states. AFFIDAVIT OF WILLIAM J. BAUMOL, FOG Sue Fe Se eee eet. : W. J. Baumol is Professor of Economies at Prineeton University and New York University and a former President of the American Eco- nomie Association. His affidavit shows that it is unsound, as a matter of hoth economic theory and practice, to attempt to divide the income of a multistate business on geographic lines in a situation where the business enjoys economies of seale and seope, and that the attempt to do so will result in duplicative taxation and bur- dens on the conduct of interstate business. AFFIDAVIT OF HORACE BROCK, Filed Saly BO, 3OOR sco poe ese Horace Brock is Distinguished Professor of Aeeounting and Director of the Extractive Industries Accounting Research Institute. His affidavit demonstrates that exclusive allocation overattributes ineome to Alaska and is improper from the point of view of accepted revenue accounting practices for the oil indus- try. 216a 253a ill SUPPLEMENTAL AFFIDAVIT OF HOR- ACE BROCK, Filed November 17, 1982 ..... : In his supplemental affidavit, Mr. Brock demon- strates that the Oil Tax allows no deduction from taxable income for any profits attributable to aetivities outside Alaska. AFFIDAVIT OF THOMAS W. GILLETTE, I OM 5 ok kg eas vee eb ow eee Thomas W. Gillette is a Senior Supply Consult- ant in the Supply Department of Exxon. His affidavit shows the interstate structure of Exxon’s oil production and shows that only a de minimis amount of the oil Exxon produces in Alaska is sold in Alaska. SOHIO FACT SUMMARY, Filed July 30, 1982 This summarizes affidavits submitted to the Superior Court by Sohio employees, ineluding affidavits which show that Sohic’s oil produe- tion is interstate in structure, that the great majority of its oil sales are outside of Alaska, and that the Oil Tax allocates to Alaska 100% of Schio’s oil production income and taxes a dis- proportionate share of its total income. 29la 329a K. L. iv AFFIDAVIT OF SCOTT K. TOMPKINS, eo eS a ra Seott K. Tompkins is a staff tax accountant in the Atlantie Richfield Company Tax Depart- ment. His affidavit shows the degree to which the Oil Tax subjected Atlantie Richfield Com- pany to double taxation during all tax years at issue. In addition, it shows that in all such tax years, uniform adoption of Alaska’s law would subject well in exeess of 100% of the income of Atlantie Richfield Company to tax. AFFIDAVIT OF OSCAR E. JONES, Filed ok Sere er rer aan. we Osear E. Jones is Supervisor of the Income and Franchise Tax Seetion of the Tax Compliance Division of Exxon. His affidavit shows the degree to which the Oil Tax subjected Exxon to double taxation during all tax years at issue. In addition, it shows that in all such tax years, uniform adoption of Alaska’s law would subject well in excess of 100% of the income of Exxon to tax. AFFIDAVIT OF E. WAYNE TANNER, Filed bee oe ee E. Wayne Tanner is Manager, Tax Legislative Affairs in the Accounting Department of Sohio. His affidavit shows the degree to which the Oil Tax subjected Sohio to double taxation during all tax years at issue. In addition, it shows that in all sueh tax years, uniform adoption of Alaska’s law would subject well in excess of 100% of the income of Sohio to tax. Page . 368a 376a 380a 0). AFFIDAVIT OF R. F. HEIDNER., Filed July SO, BOR. ois kee cab eead eee eee R. F. Heidner is the Manager of the Tax Com- plianee Division of Exxon. His affidavit includes a table which sets forth each state where Exxon filed a tax return and which required Exxon to include in the income base to be apportioned income from production of oil in Alaska. AFFIDAVIT OF GARY L. JENKINS, Filed November 37, BGG .o56k 640530052 Gary L. Jenkins was Director of the Division of Audit in the Alaska Department of Revenue from December 1974 until July 1981. His affida- vit shows that in the period 1978-81 Alaska consistently interpreted its tax laws as requir- ing that an oil company with producing wells or pipelines outside Alaska, but not in Alaska, apportion to Alaska a share of the income from such wells or pipelines. Page 406a 408a vi FIRST SUPPLEMENTAL AFFIDAVIT OF ROBERT E. MeMANUS AND SUPPORTING EXHIBITS, Filed July 13, 1984 ............ Robert E. MeManus is Senior Tax Counsel of Atlantie Richfield Company. His affidavit and supporting exhibits show that if Alaska Depart- ment of Revenue Ruling 82-2, as interpreted by the Department of Revenue, were applied in every state, in those states where a taxpayer is engaged in exploration activities but not in production or pipeline activities, it would be subject to apportionment under AS 43.20, but could not deduct from its apportionable income its exploration losses. LIST REQUIRED BY RULE 28.1.......... Page 410a APPENDIX Za A. COPIES OF THE DECISIONS APPEALED FROM I. Opinion of the Supreme Court of Alaska, dated August 16, 1985, affirming the judgment of the Superior Court. f IN THE SUPREME CoURT OF THE STATE OF ALASKA File No. S-52 OPINION [No. 2965 — August 16, 1985] ATLANTIC RICHFIELD COMPANY; ARCO Pipe LINE COMPANY; BP ALASKA, INC.; EXXON CORPORATION; EXXON PIPELINE COMPANY; and SoHIO PIPE LINE COMPANY, Appellants, Vv. STATE OF ALASKA; ALASKA DEPARTMENT OF REVEN'E; ALASKA DEPARTMENT OF ADMINISTRATION; COMMISSIONER OF REVENUE ROBERT D. HEATH, and COMMISSIONER OF ADMINISTRATION LISA RUDD, Appellees. Appeal from the Superior Ceurt of State of Alaska, Third Judicial District, Anchorage, Victor D. Carlson, Judge. [List of appearances omitted | Before: BURKE, C.J., RABINOWITZ, MATTHEWS, and Moore, JJ. [COMPTON, J., not participating] OPINION BURKE, Chief Justice. 3a This is an appeal brought by several major oil produe- ing companies in Alaska’ challenging the constitutionality of the Oil and Gas Corporate Income Tax, Former AS 43.21 (repealed 1982) (“the Oil Tax”).” The issue is whether the State of Alaska must, as a matter of econstitu- tional law, use the formula apportionment method to determine the portion of each corporation's worldwide oil production and pipeline transportation income that can be attributed to Alaska. During the tax years 1978 to 1981 the state used separate accounting, instead of formula apportionment, to determine taxable production and pipe- line transportation income. Various actions challenging the constitutionality of the Oil Tax were consolidated on August 27, 1980, in the superior court.® Appellants ARCO, Exxon, and Sohio argued below that the Oil Tax violated the commerce, due proeess, contract, and equal protection elauses of the United States Constitution. as well as the equal protec- tion elause of the Alaska Constitution and the state constitutional and statutory provisions against retroactiv- ity. They sought a refund of taxes paid under the Oil Tax. On November 12, 1981, the state moved for summary judgment seeking a declaration that the Oil and Gas ‘Atlantie Richfield Company and ARCO Fipeline Company (collee- tively “ARCO”), Exxon Corporation and Exxon Pipeline Company (ecolleetively “Exxon”), and BP Alaska, Ine. and Sohio Pipe Line Company (collectively “Sohio”). *AS 43.21 (Ch. 110, § 3, SLA 1978; am. eh. 113, §§ 28-32, SLA 1980; am. ch. 116, §§ 6-11, § 17 SLA 1981) was repealed effective January 1, 1982. Ch. 116, § 19, SLA 1981. For convenience, we refer to the Oil Tax by the former statutory section numbers throughout this opinion. See Appendix 1 for the full text of AS 43.21. 'Other oil companies were also involved initially in the litigation, but were dismissed upon agreeing to defer their constitutional claims pending resolution of this case. 4a Corporate Income Tax Act is constitutional. The trial court rejected the oil companies’ claims of uneonstitution- ality and granted the state’s motion for summary judg- ment. We affirm. f I. THE OIL TAX In 1959, Alaska adopted the three-factor apportionment formula of the Uniform Division of Income for Tax Pur- poses Act (UDITPA) to determine the share of income of an integrated (unitary) interstate business subject to Alaska income taxation. AS 43.20.130 (repealed 1975).* The apportionment formula relies on three indicators of business activity — payroll, property and sales — to com- pute Alaska’s share of taxable income. Jd. The value of property, payroll and sales in Alaska is compared to the value of property, payroll and sales of the corporation worldwide. The resulting ratio is then multiplied by the eorporation’s apportionable net income worldwide to ar- rive at an approximation of Alaska’s share of taxable income. Prior to the enactment of the Oil Tax in 19738, all of the income tax liability of oil companies was determined under the formula apportionment method. Under the Oil Tax, a different methodology, separate accounting,’ was implemented to ealeulate the production and pipeline transportation income subject to Alaska taxation. The goal of the separate accounting method was to determine that portion of the value of a barrel of oil attributable to *In 1970, Alaska adopted the Multistate Tax Compact, enacted as AS 43.19.010. It is basically a restatement of UDITPA with a few minor changes. Tie three-factor apportionment formula is now de- seribed at AS 43.19.010, art. IV, $§ 9-15. °*The oil companies dispute whether the methodology of the Oil Tax is in faet “true” separate accounting. See infra section II. B. 5a the oil being produeed, i.e., taken from the ground. AS 43.21.020. The separate accounting of oil production income began with the determination of gross production revenue or “gross income.” The Oil Tax defined gross income as the value of the oil at the point of production, i.e., the ‘The following graph, submitted by the State of Alaska, illustrates the estimated revenues, costs and profits contained in each barrel of Alaskan oil during the years 1978-80: TOTAL Ott COMPANY umm GROSS REVENUE ee Per Se Retining Costs & Profits $5.72 ee ee want as ng Transoortation Costs & Profits $7.14— (pipeune & marine) 7 WELLHEAD PRICE STATUTORY GROSS PROOUCTION REVENUE | ——ae $11.78 (44.2%) | — | _Povares 5, Ei Pp ( Oduction. Winataii Protit $ $1.92 Ad Valorem Taxes z Expioration Costs Excensed Genera Overnead 4 Agmenstratve inci 1981 revisions) | AS 43 21 TAXABLE NET PRODUCTION ' | Sq} come | | $6.77 (25.4%) SOURCE Oeasin 26 Supprementa: Attidawt* 1S. A 16917. 16929 Gir 1 6a wellhead price. AS 43.21.020(b). Essentially, gross in- come equalled the price at which the oil was sold, or could be sold, to a refinery less transportation expenses. AS 43.21.020(b). The price at which oil was sold, or could be sold, to a refinery obviously did not inelude refining and marketing costs and profits. These costs and profits were thus excluded in determining the gross income figure for Alaskan oil. In addition, a number of other costs were dedueted from gross income. “Upstream” costs, such as exploration expenses, royalties, lease acquisition and de- velopment costs, and general overhead and administrative expenses, and “downstream” costs, such as transporta- tion and marketing costs were deducted from gross in- come. AS 43.21.020(¢). The end result was net production income, which was taxed at the 9.4% rate applicable to all other corporate income at that time. Former AS 43.20.011 (amended, repealed and reenacted 1981). The Oil Tax used a similar methodology to tax income from the pipeline transportation of oil and gas in Alaska. The items of income and expense related to Alaska pipe- line transportation were keyed to the amount reported by the oil companies to the Federal Energy Regulatory Commission as net operating income. AS 43.21.030. The validity of this portion of the Oil Tax is also at issue in this case, though the parties foeus primarily on the taxation of production income. Under AS 43.21.040, all other income of the oil compa- nies continued to be taxed under the UDITPA formula apportionment method. Such other income was primarily from marketing and refining operations. In computing this income, worldwide oil production and pipeline trans- portation income was subtracted from the total amount of income subject to apportionment by Alaska. Then the three-factor formula was applied, again with the produc- Ta tion and pipeline income in Alaska deleted. The result attributed to Alaska a portion of worldwide refining and marketing income of the oil company approximating the share of such activities occurring in Alaska. This income, like the production and pipeline income, was taxed at the rate of 9.4%. Former AS 43.20.011 (amended, repealed and reenacted 1981). The Oil Tax was repealed effective January 1, 1982. Ch. 116, $19, SLA 1981. It was replaced with a modified apportionment formula for the ensuing tax years. AS 43.20.072. The legislature took this step primarily to avoid a further increase in the possible $1.8 billion liability caused by this litigation. Il. THE OIL TAX IS “TRUE” SEPARATE ACCOUNTING There are three basic methods by which the income of a multistate enterprise can be divided among the states entitled to tax the enterprise’s income: separate account- ing, specific allocation by situs and formula apportion- ment. The state claims the Oil Tax is true separate accounting, while the oil companies contend it is specific alloeation by situs. A. The Three Methods For Division of Income 1. Separate Accounting Separate accounting attempts to carve out of the tax- payer's overall business the income derived from sources within a single state, and by accounting analysis, to determine the profits attributable to that portion of the business.’ Income within the state is determined without "See generally J. Hellerstein, State Taxation: Corporate Income and Franchise Taxes € 8.3, at 323-327 (1983). 8a reference to the suecess or failure of the taxpayer's activities in other states.” In the ease of goods (such as erude oil) sent to another state for processing, separate accounting values these goods at the price which could be obtained for them in their unprocessed form when ‘leaving their state of origin.’ In other words, separate accounting recognizes that crude oil has a marketable value before it is retined. 2. Specific Allocation by Situs Specific allocation by situs refers to the method of dividing a tax measure (in whole or in part) by tracing particular property, receipts, or income to their source state, and attributing the item in its entirety to that state.'” This method is troublesome because more than one state is likely to have a legitimate basis for taxing the same item, especially when the tax is one measured by income.'| The specific allocation method has been used commonly with “non-business” income such as income from dividends, patent and copyright royalties, and gains or losses from the sale of capital assets.’” Under UDITPA, some non-business income of this nature is allocated in its entirety to the situs state. See AS 43.19.010, art. IV, §$§ 5-8. Confusion may arise because the separate accounting methodology is very similar to the specific allocation Sp. Hartman, Federa! Limitations on State and Loeal Taxation § 9.17, at 522 (1981). °G. Altman & F. Keesling, Allocation of Income in State Taxation 38 (2d ed. 1950). 'J. Hellerstein, supra note 7, § 8.4, at 328. ad 21d. at 329. 9a approach. Both methods attempt to trace income to an identifiable source. The primary difference in the two methods is that separate accounting looks to the activities in the state and seeks to determine the income related to that activity. Specific allocation attributes income accord- ing to situs, or some other specific characteristic of the business enterprise, rather than on the basis of where the income itself was earned. Moreover, specific allocation results in all of a specified type of income and all associated profits being allocated to one state. Separate accounting, on the other hand, attempts to segregate out only those profits attributable to activities within the state for taxation by that state. 3. Formula Apportionment Formula apportionment is the method commonly used to divide the income of a unitary business’ among various jurisdictions in which the business operates. The formula method, “unlike separate accounting, does not purport to identify the precise geographical source of a corporation’s profits; rather, it is employed as a rough approximation of a corporation’s income that is reasonably related to the activities conducted within the taxing State.’'* The formula method assumes that the total income of a busi- ness enterprise results from certain income producing factors — typically property, payroll and sales. The value of the corporation’s property, payroll and sales within the taxing state is compared with the value of these factors 13.4 [ A] unitary business may be defined simply as any business which is earried on partly within and partly [outside] the taxing jurisdiction.” Keesling & Warren, The Unitary Concept In the Alloca- tion of Income, 12 Hastings L.J. 42, 46 (1960). Moorman Mfg. v. Bair, 437 U.S. 267, 273, 57 L. Ed. 2d 197, 204 (1978). 10a outside the taxing state. The resulting ratio is then multiplied by the total apportionable net income world- wide of the multi-state corporation.” B. The Oil Tax Is Separate Accounting The oil companies equate the Oil Tax with the specific allocation by situs method. They contend that the Oil Tax attributes all of the income and profits from oil produc- tion and transportation to Alaska. Their argument ig- nores the difference between the Oil Tax and the specific allocation method. The Oil Tax does not attribute income from the production of oil in its entirety to Alaska, the source state. Instead, it attempts to tax only that portion of ineome from the oil which is fairly related to Alaskan production activities. While total revenue for a barrel of oil during 1978-80 was approximately $26.64, only $6.77 was deemed production income attributable to Alaskan activities and subject to the Oil Tiax.’® In segregating from total income a portion related only to activities in the state, the Oil Tax operates as a separate accounting system. The companies argue that the Oil Tax is not true separate accounting because it fails to take into account the profit-producing nature of activities oecurring outside Alaska. For example, the geological and geophysical anal- '°p. Hartman, supra note 8, § 9.18, at 523-524. ‘The wellhead price did not inelude refining and marketing costs and profits. The following deductions were also taken from the wellhead price: royalties, native corporation revenue sharing, produc- tion, ad valorem and windfall profit taxes, direct operating expenses, exploration, acquisition, and development costs, uneapitalized inter- est and general overhead and administrative expenses inside and outside Alaska (ineluding a reasonable profit). AS 43.21.020(c); 15 AAC 21.200 (Eff. 2/22/79). See graph supra note 6. lla ysis of the Prudhoe Bay area was conducted primarily outside Alaska. The companies argue that only the ex- penses associated with these outside activities are deduct- ible in computing income subject to the Oil Tax. Thus, in their view, the Oil Tax taxes profits earned outside Alaska. The state contends that oil companies can deduct prof- its attributable to general overhead or administrative activities outside of Alaska. Under Department of Reve- nue regulations, profits associated with such activities could be deducted if the taxpayer in fact considered them profit generally and reported them as such to the stock- holders. 15 AAC 21.290(b) (Eff. 2/22/79, am. 3/26/82). The oil companies claim that the Security Exchange Commission prohibits the allocation of profits in this manner, citing 15 U.S.C. § 78m(b)(2)(B) (ii) (1982). This section provides that every issuer of a security subject to the provision must have an internal accounting system that permits preparation of financial statements ‘in conformity with generally accepted accounting princi- ples or any other criteria applicable to such statements.” The parties’ experts disagree on the acceptability, under general accounting principles, of allocating profits to general overhead and administrative activities. Even if we assume that the allocation of profits to these activities is not generally accepted, 15 U.S.C. §$ 78m(b) (2) (B) (ii) allows the use of “other criteria” in financial statements. If, as the oil companies claim, profits exist that are actually attributable to general overhead and administra- tive activities outside of Alaska, the Securities Exchange Act does not prevent them from reporting such profits to their shareholders, and then deducting them from their Alaska income tax. lZa Although amended after the repeal of the Oil Tax in 1982, 15 AAC 21.290(b) (Eff. 2/22/79, am. 3/26/82) operates retroactively.'’ The oil companies, therefore, may amend their tax reports and returns to deduct any outside-generated profits attributable to genera! foverhead and administrative activities associated with Alaskan oil production not previously deducted in computing Alaskan taxable income. The companies also assert that the Oil Tax is an inappropriate methodology because it presumes that "The only logical interpretation of the 1982 amendment to 15 AAC 21.290(b) is that it operates retroactively for the tax years 1978-81. It cannot be meaningfully applied prospectively because it was adopted after the Oil Tax was no longer in effect. We must assume that the process of amending 15 AAC 21.290(b) was intended to be operative. We cannot imagine that the Department of Revenue (“Department”) would engage in a futile act. See 2A C. Sands, Sutherland Statutory Construction § 45.12, at 54 (4th ed. 1984). The retroactivity of the Department’s regulations is governed by the Alaska Administrative Procedure Act, AS 44.62.240. Under this statute, an “interpretative regulation,” such as 15 AAC 21.290(b), may be retroactive only if the agency “has adopted no earlier inconsistent regulation and has followed no earlier course of conduct inconsistent with the regulation.” The Department’s earlier omission of a deduction for outside-generated profits attributable to general overhead and administration associated with Alaskan oil production could be construed as inconsistent conduct with the 1982 amendment to 15 AAC 21.290(b). AS 44.62.240, however, is concerned with the issues of fairness and notice. See, e.g., AS 43.21.050(d) (authorizing Department to fashion an equitable tax if relief from an unfair allocation is required). In this case, a retroactive interpretation of the 1982 amendment confers a benefit on the oil companies by allowing an additional tax deduction not previously available. Unlike many retroactive enactments, 15 AAC 21.290(b), as amended, does not create a harsh or unfair result for the affected parties. Therefore, the 1982 amendment to 15 AAC 21.290(b) operates retroactively for the tax years 1978-81. l3a crude oil has a value, i.e., that income has been generated when the oil is merely brought out of the ground. The oil companies argue that oil has no value whatsoever until it is sold. The oil companies cite our decision in Sjong v. State, Department of Revenue, 622 P.2d 967 (Alaska 1981), appeal dismissed, 454 U.S. 1131, 71 L. Ed. 2d 284 (1982), for the proposition that the oil has no value until it is sold. We find their reliance misplaced. In Sjong, we upheld an apportioned net income tax assessed against a nonresi- dent crab fisherman, who fished exclusively in the interna- tional waters surrounding Alaska and sold his eateh only to Alaska processors and canneries. Sjong claimed that no taxable income could be attributed to the state because he caught the crabs in international waters. We re- sponded that “the process of fishing results in no profits until the eatch is sold to processors in Alaska.” 622 P.2d at 972 (footnote omitted). Obviously, profits do not result from crab fishing or oil production until the product is sold. This does not negate the fact that profits generated by the sale are partly attributable to the inherent value of the crab or oil at its point of production. In the state’s view, the extraction of a natural resource, in and of itself, generates income. Thus, it argues that it is reasonable to attribute the income identified with the extraction of oil, measured in terms of “well-head value,” to the state in which the oil was extracted. The state is joined in this position by Amicus Curiae, the states of Louisiana, Mississippi and Oklahoma, all which have long employed separate accounting to tax oil production ineome.”® 18See also Texas Co. v. Cooper, 107 So. 2d 676, 687-91 (La. 1958) (rejected argument that production of oil, in absence of sale, does not result in taxable income); Magnolia Petroleum v. Oklahoma Tax l4a The United States Supreme Court has likewise recog- nized the inherent value generated by the extraction of natural resources. In upholding the constitutionality of Montana’s severance tax on coal mined in the state, the Court reasoned that “[t]he entire value of the edal, before transportation, originates in... [Montana], and mining of the coal depletes th» resource base and wealth of the State, thereby diminishing a future source of taxes and economie activity.”” Commonwealth Edison v. Montana, 453 U.S. 609, 624, 69 L. Ed. 2d 884, 898 (1981) (footnote omitted). Before it is transported for sale, oil, like coal, has inherent value, to which profits and income ean properly be attributed.” We hold that the Oil Tax is fundamentally a separate accounting method for dividing income, distinct from both the specifie allocation by situs and formula appor- tionment methods. Comm'n, 121 P.2d 1008, 1013 (Okla. 1941) (“[O]il produced in the state had an easily ascertainable market price that would represent the value of the product attributable wholly to Oklahoma.”). While party to a tax suit in South Carolina, Exxon recognized the existence of oil's wellhead value. In its brief, Exxon asserted that “E&P [exploration and production] income is fully earned at the wellhead, and... [is] funetionally independent of... refining and marketing operations.” Appellant’s Opening Brief at 19, Exxon v. South Carolina Tax Comm'n, 258 S.E.2d 93 (S.C. 1979), appeal dismissed, 447 U.S. 917, 65 L. Ed. 2d 1109 (1980). Exxon weni on to note that their witness testified that the posted field price was also accepted by the accounting profession as a reliable, independent measure of the value of crude oil at the wellhead. Using this value,...the net income earned by exploration and production could be and is accurately measured. This is in accordance with generally ac- cepted accounting principles, because crude oil has a known, realizable value. Id. at 26. 15a C. Separate Accounting More Accurately Attributes In- come Generated from Alaskan Oil Than Does Formula Apportionment The use of separate accounting to apportion the income of a unitary business, such as each of the companies in this litigation, has been roundly ecriticized.”” The United States Supreme Court has noted: The problem with this method is that formal account- ing is subject to manipulation and imprecision, and often ignores or captures inadequately the many subtle and largely unquantifiable transfers of value that take place among the components of a single enterprise. Container Corp. of America v. Franchise Tax Board, 463 U.S. 159, 164-65, 77 L. Ed. 2d 545, 553 (1983) (citation omitted). For instance, while it [separate accounting] purports to isolate portions of income received in various States, [it] may fail to account for contributions to income re- sulting from functional integration, centralization of management, and economies of scale. Because these factors of profitability arise from the operation of the business as a whole, it becomes misleading to charac- terize the income of the business as having a single identifiable “source.” Although separate geographi- eal accounting may be useful for internal auditing, See, e.g., G. Altman & F. Keesling, supra note 9, at 38 (“It is obvious, however, that a separate accounting, no matter how detailed, is basically false if the business done in more than one state is of a unitary character,...’’); Dexter, The Unitary Concept in State Income Taxation of Multistate-Multinational Businesses, 10 Urb. Lawyer 181, 207 (1978) (“[T]he use of separate accounting to attribute unitary income to a taxing jurisdiction is conceptually inconsistent.’’). l6a for purposes of state taxation it is not constitutionally required. Mobil Oil v. Commissioner of Taxes, 445 U.S. 425, 438, 63 L. Ed. 2d 510, 521 (1980) (emphasis added; citations omitted). These eriticisms, however, are inapplicable to the oil and gas industry. The standard three-factor formula ap- portionment method was “developed and designed to meet the needs of manufacturing and mereantile indus- tries, and [is] poorly adapted to a good many other businesses.””’ The United States Supreme Court has noted that the three-factor formula is “necessarily imperfect”: First, the one-third-each weight given to the three factors is essentially arbitrary. Second, payroll, property, and sales still do not exhaust the entire set of factors arguably relevant to the production of income. Container Corp. of America v. Franchise Tax Board, 463 U.S. at 183 n.20, 77 L. Ed. 2d at 565 n.20 (emphasis added). An assumption made in the use of formula apportionment is that “major income-producing elements ean be identified and that these major elements contrib- ute the largest portion of the unitary income of the taxpayer.” A unique characteristic of unitary oil and gas busi- nesses is that the major income-producing element is the value of the oil and gas reserves in the ground. While this “J. Hellerstein, supra note 7, € 10.9, at 689. “24. Cohen, Apportionment and Allocation Formulae and Factor: Used by States in Levying Taxes Based on or Measured by Net income of Manufacturing, Distributive and Extractive Corporations 14 (1954). |Reeord 1561} 17a element can be readily identified, it is not recognized under traditional formula apportionment methods.” In- stead, the typical factors used are property, payroli and sales, none of which accurately reflects the oil and gas corporations’ activities in Alaska. The property factor ineludes only the original cost of the wells and the lease, which do not necessarily represent the value of the 0! reserves themselves. See AS 43.19.010, art. IV, § 11. As a result, the Prudhoe Bay field is valued at about one percent of its actual worth.”* Under UDITPA, the payroll factor includes only wages paid to employees based in the state. AS 43.19.010, art. IV, $§ 13-14. Oil production, however, is not a labor-intensive industry. Moreover, much of the preduetion work is done by employees based in other states, or by independent contractors, whose earnings do not appear in the payroll factor. Finally, and most importantly, the sales receipts under UDITPA are eredited solely to the destination state. AS 43.19.010, art. IV, § 16. The oil companies and the state agree that only a “tiny fraction” of the oil produced in Alaska is actually sold within the state. For all of the above reasons, separate accounting, not formula apportionment, is the prevailing method through- out the United States for reporting income from oil production ~ The Comptroller General’s report explains 31d. 2 ’ ‘ b *4See B. Sorensen, Memorandum to the Honorable Nels A. Ander- son, Jr. (May 27, 1976) (discussing state corporate income tax). “Rudolph, State Taxation of Interstate Business: The Uniicry Busi- ness Concept and Affiliated Groups, 25 Tax L. Rev. 171, 191 (1970). Of the top five producing states, three — Alaska, Louisiana and Oklahoma — require the use of separate accounting to determine income attributable to oil production. Texas imposes no corporate income tax, and California requires formula apportionment. Statisti- 18a that states use separate accounting to determine the income division for unitary oil and gas businesses “‘be- cause it conforms more to [the businesses’] financial accounting procedures and...more accurately reflects income than formula apportionment.””° : Alaska has not employed separate accounting to divide the income of all unitary businesses. According to the state, the Alaska legislature turned to separate account- ing for oil producing businesses only after it determined that the use of formula apportionment to compute Alaska’s share of oil production income would seriously underestimate the production income that was rightly subject to taxation by this state.”’ The oil companies cite portions of legislative history to show that the Oil Tax was imposed in an effort to unilater- ally effect a renegotiation of oil leases so as to shift the eost of Alaska’s government to the oil industry. The legislature, however, formally declared that the income tax of corporations engaged in oil production or pipeline transportation would be computed under the Oil Tax beeause the formula apportionment method did not fairly represent the extent of those corporations’ oil production and transportation activities in Alaska. Ch. 110, $1, SLA eal Abstract of the United States at 730 (1983). But see Cal. Rev. & Tax Code Ann. § 25137 (West 1979) (allowing separate accounting, or other alternative methods of apportionment, when total formula apportionment does “not fairly represent the extent of the taxpayer's business activity in this state.’’). *°GAO Report to the Chairman, House Committee on Ways and Means: Key Issues Affecting State Taxation of Multijurisdictional Corporate Income Need Resolving 3 (1982). [Reeord 17,023}. “The Oil Tax was enacted only after it was considered by two legisiatures over a four year period. Sixty-three hearings were held and dozens of studies and reports were made. 19a 1978. To look beyond this articulated basis would lead to a “parade of legislators’ affidavits containing their per- ceptions” of the Oil Tax’s purpose. Alaska Public Employ- ees Association v. State, 525 P.2d 12, 16 (Alaska 1984). We have recently disapproved of such inquiries. Jd. The United States Supreme Court has also declined to search ’ for the “real” motive beyond the legislature’s expressed purposes when adjudicating equai protection and com- merece vlause challenges. In Minnesota ». Clover Leaf Creamery, 449 U.S. 456, 66 L. Ed. 2d 659 (1981) the Court stated that it would assume that the objectives articulated by the legisla- ture are actual purposes of the statute, unless an examination of the circumstances forces us to econ- elude that they ‘could not have been a goal of the legislation.” 449 U.S. at 463 n.7, 66 L. Ed. 2d at 668 n.7 (quoting Weinberger v. Wisenfeld, 420 U.S. 636, 648 n.16, 43 L. Ed. 2d 514, 525 n.16 (1975)). Nothing in the record leads us to econelude that aceurate and fair allocation could not have been the legislature’s goal in enacting the Oil Tax.” 8 See, e.g., Minutes of Senate Finance Committee (May 21, 1977): {T]he income tax is not designed to pick up additional money but to try to establish equal treatment between companies operating within the state.” (Statement of Senator Chaney Croft) [Reeord 4759]; Minutes of Senate Resource Committee (February 22, 1978): “If we're seeking to raise money — I think the most effective way is through a severance tax.” (Statement of Commissioner Sterling Gallagher [Record 1704]); Office Memo to Senator Rader from Kay Brown (December 22, 1977): “[S]eparate accounting [is the] most equitable method because under it every corpjoration] pays [the] same effective tax rate.” (Statement of Senator Chaney Croft) [Reeord 1661]; Testimony Before House/Senate Resources Commit- tees (January 25, 1978): “[T]he purpose [of separate accounting] is not to get higher taxation, but it gives you a direct fix on what the 20a The faet that the traditional formula apportionment method inaccurately reflects the oil companies’ income and profits derived from Alaskan production activities is illustrated in the ease of Sohio. The oil companies main- tain that during 1978-80, when the Oil Tax was in effect, an average of only 10% of Sohio’s payroll, 12% of its sales and 50% of its property were in Alaska. At the same time, Sohio indicated in its 1980 annual report that over 90% of its total oil production derived from the reserves in Alaska. [Record 1559] A media report offered by the state, with which the oil companies did not take issue, indicated that Alaskan oil had elevated Sohio from seven- teenth to seventh in earnings in the oil industry: Onee severely short of crude, Sohio’s bonanza from its huge reserves of Alaskan oil skyrocketed 1979 profits to $1.2 billion, a phenomenal 2,200% blast in just one decade.” Clearly the traditional formula apportionment method would inadequately reflect the phenomenal value of the companies’ oil reserves in Alaska. Ill. SUMMARY JUDGMENT WAS PROPER The oil companies argue that there are numerous dis- puted issues of facet which preclude summary judgment for the state. Several of the alleged disputed issues of fact are irrelevant to the constitutional challenge and do not profitability of the industry's operations are.” (Statement of consult- ant Milton Lipton) [Record 1941] *°Investing a Mountain of Cash Before the Oil Runs Out: An Oil Giant’s Dilemma, Bus. Wk. 60 (August 25, 1980). [Record 684] 2la preclude summary judgment.” Other claims by the oil companies reduce to the assertion that the characteriza- tion of the Oil Tax as a separate accounting methodology is a disputed issue of fact. The state argues that the question as to whether the Oil Tax is a form of separate accounting is a question of law. We agree with the state that a trial is not required in this case. The characteriza- tion of the Oil Tax is at most a “legislative fact’’ which is not the type of factual issue for which trial is necessary. See State v. Erickson, 574 P.2d 1, 4-6 (Alaska 1978). As the trial eourt held, “the asserted issues of material fact do not preclude summary judgment in any event because they are facts only in the sense that they provide premises in the process of legal reasoning. They are not that type of fact for which a trial is mandated.” Finally, the oil companies claim that it is a disputed issue of faet whether the Oil Tax results in double taxa- tion because it reaches income earned outside Alaska. An income attribution method, be it single-factor or three- factor formula apportionment or separate accounting, is not constitutionally invalid merely because it may result in taxation of some income that did not have its source in the state. See Moorman Manufacturing v. Bair, 437 U.S. 267, 272, 57 Lu. Ed. 2d 197, 204 (1978). Even if facts demonstrate that the Oil Tax reaches income earned outside Alaska, as alleged by the oil companies, the statute will be stricken only upon “clear and cogent evidence” that the income Alaska attributes to itself is “out of all appropriate proportions to the business trans- acted in [the] State,” or has “led to a grossly distorted result.” Container Corp. of America v. Franchise Taz “For example, whether the oil companies had, themselves, mea- sured their income by methods similar to those used by the Oil Tax is irrelevant. 22a Board, 463 U.S. at 170, 77 L. Ed. 2d at 556 (citations omitted). Nothing in the record demonstrates that the Oil Tax led to a “grossly distorted result” or that it is “out of all appropriate proportions” to the business of extracting billions of barrels of oil from reserves ldeated within Alaska. Disposition by summary Judgment was appropriate in this ease because no issue of material fact remained. The record provided the trial judge with a sufficient back- ground to reach a decision.” See Kelly v. Zamarello, 486 P.2d 906, 914 (Alaska 1971); cf. Ault v. Alaska State Mortgage Association, 387 P.2d 698, 701-02 (Alaska 1963). IV. CONSTITUTIONAL CHALLENGES TO THE OIL TAX A. Background When state corporate income taxes were first adopted,” separate accounting was regarded as the most precise method for dividing the income of a multistate corporation for taxation purposes.” Although apportion- ment formulas were employed by states and their use 31 4n extensive record was developed, which is divisible into three categories. First, the bulk of the reeord consists of the legislative history of the Oil Tax. Second, competing affidavits from various economists and accountants present divergent economic theories on how oil production income is generated, and how, as a matter of policy, it should be divided among the states for taxation purposes. Finally, a large number of affidavits submitted by the companies deseribe the various activities associated with oil production which occur outside Alaska. “Wisconsin adopted the first corporate income tax in 1911. J. Hellerstein, supra note 7, € 1.2, at 5. Bd. € 8.3, at 324. 23a approved by the United States Supreme Court,” separate accounting was initially viewed as a benchmark by which te judge the reasonableness of state apportionment for- mulas. Thus, in Hans Rees’ Sons, Inc. v. North Carolina, 283 U.S. 123, 128, 75 L. Ed. 879, 905 (1931), the Supreme Court invalidated a state’s apportionment formula under federal due process because the taxpayer showed that under separate accounting only 17% of the income was attributable to the state, whereas under the apportion- ment formula used, the state taxed from 66% to 85% of the corporation’s income. The use of separate accounting as a basis for challeng- ing state formula apportionment methods was eventually rejected in Butler Brothers v. McColgan, 315 U.S. 501, 86 L. Ed. 991 (1942). There, the Court acknowledged that an apportionment formula could be invalidaied only if the taxpayer established by clear and cogent evidence that the formula taxed extraterritorial values. The Court held that the fact that no net income would be attributable to the state under separate accounting was insufficient to invalidate an apportionment formula. It is true that appellant’s separate accounting system for its San Franciseo branch attributed no net in- eome to California. But... [that] does not prove appellant’s assertion that extraterritorial values are being taxed. 315 U.S. at 507, 86 L. Ed. at 996. The Court developed the doctrine that if a multi-state business is unitary, then the use of a formula apportion- “Underwood Typewriter v. Chamberlain, 254 U.S. 113, 65 L. Ed. 165 (1920). 24a ment method by the state is presumptively valid.” In the instant litigation, all of the companies involved are uni- tary businesses. Thus, it is undisputed that the use of an apportionment formula would have been a permissible - means of atrributing a portion of the companies’ income to Alaska. This ease presents an interesting twist on previous constitutional challenges to state taxation methods by corporate taxpayers. In the past, apportionability often has been chal- lenged by the contention that income earned in one State may not be taxed in another if the source of the income may be ascertained by separate geographical accounting. Mobil Oil v. Commissioner of Taxes, 445 U.S. at 438, 63 L. Ed. 2d at 521. Conversely, in this litigation, the oil companies seek to defeat Alaska’s separate accounting method by arguing that formula apportionment is _ re- quired for unitary businesses. In recent years, the Court’s endorsement of formula apportionment as the preferred method to divide income of a unitary business has become increasingly apparent.’ However, we do not interpret this preference as being a constitutional ruling that formula apportionment must be employed in lieu of separate accounting. ®See J. Hellerstein, supra note 7, € 8.7, at 338-343. 6 See, e.g., Exxon v. Wisconsin Dep't of Revenue, 447 U.S. 207, 229- 30, 65 L. Ed. 2d 66, 85 (1980); Mobil Oil v. Commissioner of Taxes, 445 U.S. 425, 446, 63 L. Ed. 2d 510, 526 (1980). 25a While separate accounting is not constitutionally re- quired,” and while it may have some weaknesses when applied to some unitary businesses,” this methodology has not been rejected as unconstitutional. The United States Supreme Court in Container Corp. concluded that: Both geographical accounting and formula appor- tionment are imperfect proxies for an ideal which is not only difficult to achieve in practice, but difficult to describe in theory.... But we see no evidence demonstrating that the mar- gin of error (systematic or not) inherent in the three- factor formula is greater than the margin of error (systematic or not) inherent in... separate account- ing.... 463 U.S. at 182, 183-84, 77 L. Ed. 2d at 564, 565. B. Due Process The oil companies claim that the Oil Tax is unconstitu- tional because it taxes extraterritorial values. They claim that the state impermissibly taxes all of their production income from Alaska oil, despite the contributions that other states have made to those earnings in terms of research, management and sales. “As a general principle, a state may not tax value earned outside its borders.” Earth Resources v. State, Department of Revenue, 665 P.2d 960, 966 (Alaska 1983) (quoting ASARCO v. Idaho State Tax Commission, 458 37See Mobil, 445 U.S. at 438, 63 L. Ed. 2d at 521; Exxon v. Wisconsin Dep’t of Revenue, 447 U.S. at 223, 65 L. Ed. 2d at 8&1. 3 See Mobil, 445 U.S. at 438, 63 L. Ed. 2d at 521; Earth Resources v. State, Dep't of Revenue, 665 P.2d 960, 966 (Alaska 1983). 26a U.S. 307, 315, 73 L. Ed. 2d 787, 794 (1982)); Container Corp. of America v. Franchise Tax Board, 463 U.S. at 164, 77 L. Ed. 2d at 552. Any attempt to tax extraterritorial values would be an unconstitutional taking of property under the due process clause.”” Due process imposes two requirements before a state may tax income generated in interstate ecommerce. First, a “minimal connection” must exist between the interstate activities and the taxing state. Second, the income attributed to the taxing state must bear a rational relationship to intrastate values of the enterprise. Exxon v. Wisconsin Department of Revenue, 447 U.S. 207, 219-220, 65 L. Ed. 2d 66, 79 (1980); Mobil Oil v. Commissioner of Taxes, 445 U.S. at 436-37, 63 L. Ed. 2d at 520; Moorman Manufacturing v. Bair, 437 U.S. at 272-73, 57 L. Ed. 2d at 204. The first requirement — a minimal connection — is es- tablished if the corporation “avails itself of the ‘substan- tia! privilege of carrying on business’ within the State.” Exxon v. Wisconsin Department of Revenue, 447 U.S. at 220, 65 L. Ed. 2d at 79 (quoting Mobil, 445 U.S. at 437, 63 L. Ed. 2d at 520, quoting Wisconsin v. J.C. Penney Co., 311 U.S. 435, 444-45, 85 L. Ed. 267, 271 (1940)). Clearly, a nexus exists between the oil production and transporta- tion activities of ARCO, Exxon, and Sohio, and the State of Alaska. As to the second requirement, the United States Su- preme Court has not required absolute precision in deter- mining a state’s share of interstate income. In Moorman “The due process clause of the fourteenth amendment provides in part: [N]or shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its Jurisdiction the equal protection of the laws. U.S. Const. amend. XIV, § 1. 27a Manufacturing v. Bair, 437 U.S. 267, 57 L. Ed. 2d 197, an animal feed company which manufactured its product in Illinois and sold it in Iowa challenged the constitutional- ity of lowa’s statutory apportionment formula. Instead of the typical three-factor (payroll, property and sales) formula, lowa used a single-factor formula based exelu- sively on sales. The corporation argued that this formula resulted in extraterritorial taxation and violated the due process and commerce clauses of the federal Constitution. In addressing the rational relationship requirement, the Supreme Court stated: States have wide latitude in the selection of appor- tionment formulas and...a formula-produced as- sessment will only be disturbed when the taxpayer has proved by “clear and cogent evidence” that the income attributed to the State is in fact “out of all appropriate proportion to the business transacted ... in that State,” or has “led to a grossly distorted result.” 437 U.S. at 274, 57 L. Ed. 2d at 205 (citations omitted). The Court found the taxpayer had failed to demonstrate any arbitrary result in its ease, and thus the tax survived the due process challenge. More recently the United States Supreme Court has expressly refused to constitutionally require a particular income attribution method to the exclusion of all others. In Container Corp. of America v. Franchise Tax Board, 463 U.S. 159, 77 L. Ed. 2d 545, the Supreme Court upheld California’s inclusion of the income of Container Corpora- tions’ foreign subsidiaries in the state’s apportionment formula. The corporation argued that inclusion of this income violated both the due process and commerce clauses, because the same income California was subject- ing to apportionment was taxed by, foreign jurisdictions 28a under a separate accounting methodology. In rejecting this argument, the Court noted: In the ease of a more-or-less integrated business enterprise operating in more than gne State,... ar- riving at precise territorial allocations of “value” is often an elusive goal, both in theory and in practice. For this reason and others, we have long held that the Constitution imposes no single formula on the States, and that the taxpayer has the “distinet burden of showing by ‘clear and cogent evidence’ that [the state tax] results in extraterritorial values being oT One way of deriving locally taxable income is on the basis of formal geographical or transactional account- ing [separate accounting]. 463 U.S. at 164, 77 L. Ed. 2d at 552-53 (citations omitted, emphasis added). We hold that the Oil Tax satisfies the second require- ment of the due process clause. [t makes a reasonable attempt to attribute only that income to Alaska that was generated in Alaska, while excluding expenses and profits generated beyond Alaska’s borders. Under a separate accounting approach, income is viewed as earned when and where the principal operating activity occurs. Sup- port activities are universally accounted for only as ex- penses, whether they occur in or outside the income- producing state. As with other states’ separate accounting methods, the Oil Tax allows for the deduction of costs and profits from marketing, refining and transportation, and expenses related to other support activities.” Moreover, Alaska’s tax is unique in allowing a deduction for out-of- “See La. Income Tax Reg. art. 47:244.A (1985); Miss. Code Ann. § 27-7-23(b) (3) (1983); Okla. Stat. Ann. tit. 68, §2358, A.4.a,b,ec 29a state profits as well as costs of general overhead and administrative activities incident to Alaskan oil produce- tion and transportation, if the companies report them as such. See 15 AAC 21.290(b) (Eff. 2/22/79, am. 3/26/82). By allowing all of these deductions, the Oil Tax is in- tended to tax only those profits associated with the companies’ activities within the state. Thus, the Oil Tax taxes only a portion of the companies’ income, although by a technique quite different from formula apportion- ment.*’ Because the Oil Tax operates to tax only a portion of the companies’ income, we hold that it satisfies the dual requirements of due process. CC. Commerce Clause We have previously recognized that the commerce clause” “places restraints upon the taxing power of states similar to those of the due process clause. In fact, these two constitutional limits overlap to a great extent.” Sjong v. State, Department of Revenue, 622 P.2d at 973. Gener- ally, if a state tax “is applied to an activity with a substantial nexus with the taxing State, is fairly appor- tioned, does not discriminate against interstate commerce and is fairly related to the services provided by the State,” there is no impermissible burden on interstate (1985); see also Webb Resources v. MeCoy, 401 P.2d 879, 890 (Kan. 1965). "See Container Corp., 463 U.S. at 188, 77 L. Ed, 2d at 568 (Formula apportionment and separate accounting are “two distinet methods of allocating the income of a multinational enterprise.’’). “The commerce clause is set forth in article 1, §8 of the United States Constitution: The Congress shall have Power To... regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes; .. 30a commerce. Complete Auto Transit v. Brady, 430 U.S. 274, 279, 51 L. Ed. 2d 326, 331 (1977). The nexus and fair apportionment factors have been discussed in the previ- ous due process section. We now turn to a consideration of the other two factors of the Complete 'Auto Transit test. The oil companies contend that the Oil Tax violates the commerce clause because it inevitably results in overlap- ping or duplicative taxation, thus discriminating against businesses engaged in interstate commerce. They claim that recent United States Supreme Court decisions on the subject of multiple taxation render the Oil Tax unconsti- tutional, citing Japan Line v. County of Los Angeles, 441 U.S. 434, 60 L. Ed. 2d 336 (1979), Mobil Oil v. Commis- stoner of Taxes, 445 U.S. 425, 63 L. Ed. 2d 510, and Exrron v. Wisconsin Department of Revenue, 447 U.S. 207, 65 L. Ed. 2d 66. We disagree. In Japan Line, six Japanese companies challenged a California property tax on shipping containers. The Japa- nese-owned containers were subject to a property tax on 100% of their value in their home port of Japan. Under California’s tax, all containers in the state on a specified tax day were subject to an apportioned ad valorem prop- erty tax. The companies contended that California’s tax, as applied to their containers, created multiple taxation and violated the commerce clause. The Court in Japan Line assumed that the Complete Auto Transit test was met. However, because taxation of instrumentalities of foreign commerce was at issue, the Court found it necessary to inquire whether California's tax, notwithstanding its fair apportionment, created a substantial risk of international multiple Yaxation. 441 U.S. at 451, 60 L. Ed. 2d at 349. In this regard, the Court contrasted taxation of interstate instrumentalities with that of international instrumentalities: 3la In order to prevent multiple taxation of interstate commeree, this Court has required that taxes be apportioned among taxing jurisdictions, so that no instrumentality of commerce is subjected to more than one tax on its full value. The corollary of the apportionment principle, of course, is that no juris- diction may tax the instrumentality in full. “The rule which permits taxation by two or more states on an apportionment basis precludes taxation of all of the property by the state of the domicile. ... Otherwise there would be multiple taxation of interstate opera- tions.” The basis for this Court’s approval of appor- tioned property taxation, in other words, has been its ability to enforce full apportionment by all potential taxing bodies. 441 U.S. at 446-47, 60 L. Ed. 2d at 347 (citations omit- ted). While the Court could require apportionment among the states for property taxation purposes, it obviously could not prevent Japan from taxing 100% of the value of the containers. The Court held California’s nondiscrimi- natory tax unconstitutional because it resulted in actual multiple taxation of instrumentalities of international commerce.” The oil companies in the present litigation argue that if Alaska had been the home port instead of Japan in Japan Line, the Supreme Court would have invalidated Alaska's 100% ad valorem tax. We agree that Alaska would not be entitled to apply a property tax to the full value of instrumentalities of foreign commerce. But the oil compa- “The Court indicated that it need not decide “under what cireum- stances the mere msk of multiple taxation would invalidate a state tax, or whether this risk would be evaluated differently in foreign, as opposed to interstate, commerce.” 441 U.S. at 452 n.17, 60 L. Ed. 2d at 350 n.17 (emphasis in orginal) 32a nies’ attempt to equate a property tax on the full value of goods used in foreign commerce with the Oil Tax is inappropriate. While the single situs property tax may be analogous to the specific allocation by situs method of income taxation, it is a totally different species from separate accounting.” The Oil Tax, as a separate account- ing division-of-income method, does not automatically conflict with an apportionment method and result in double taxation.” Beeause separate accounting and formula apportionment can coexist without overlapping tax bases, Japan Line does not require invalidation of the Oil Tax.” In Mobil Oil v. Commissioner of Taxes, 445 U.S. 425, 62 L. Ed. 2d 510, the Court upheld the constitutionality of the inclusion of foreign source dividend income in the total income subject to taxation by Vermont. Mobil ar- gued that Vermont could not tax its dividend income because New York, the state of commercial domicile, had the power under the commerce clause te allocate ail of the dividend income to itself. Allowing Vermont to tax a share of the income by apportionment would, therefore, result in double taxation if New York implemented such a “See discussion supra section II. A. 2. Container Corp., 463 U.S. at 194-95, 77 L. Ed. 2d at 572. “There is language in Japan Line to the effect that an “unappor- tioned” tax will not be sustained. 441 U.S. at 447, 60 L. Ed. 2d at 347. However, this statement must be read in context. In the property tax area, separate accounting is not even a viable theory for dividing income. Allocation of the full property to one state or apportionment among several states are the only two options. Since allocation of the full preperty value to one of several proper taxing jurisdictions is unconstitutional, apportionment is the only permissible means of dividing the value of property used in interstate commerce for property taxation purposes. 33a tax. In this situation, the Court considered the risk of multiple taxation to be sufficient since the specific alloca- tion by situs method was “theoretically incommensurate’”’ with apportionment.*’ The Court found that if one method were constitutionally preferable, a tax based on the other method could not be sustained. 445 U.S. at 444-45, 63 L. Ed. 2d at 525. Instead of accepting Mobil’s argument that specific allocation by situs was preferable, the Court found appor- tionment to be the better approach. While the Court chose not to rule on the econstitutionality of a hypothetical New York tax, the Court stated that in theory New York could not exclusively tax Mobil’s dividend income since the dividends reflect income from a unitary business, part of which is conducted in other states. In that situation, the income bears relation to benefits and privileges conferred by several states. These are the circumstances in which apportionment is ordinarily the aeeepted method. Id. at 446, 63 L. Ed. 2d at 526 (emphasis added). Several months after the Mobil case, the Court decided Exxon v. Wisconsin Department of Revenue, 447 U.S. 207, 65 L. Ed. 2d 66. Exxon, like this litigation, involved state taxation of oil production income. Exxon’s activities in Wisconsin were limited to the marketing of petroleum products. Exxon challenged Wisconsin’s inclusion of oil production income in the income subject to apportion- ment by Wisconsin. Exxon argued that production of oil and marketing of oil were two distinct operations. In Exxon’s view, since it could illustrate by separate ac- eounting that these two activities were distinet, Wiscon- “Cf, Moorman, 437 U.S. at 277, 57 L. Ed. 2d at 207. 34a sin could not constitutionally inelude production income in the tax base for apportionment. Exxon contended that the commerce clause required the allocation of all income derived frem exploration and production functions to the situs state, rather than inclu- sion in the apportionment formula. Exxon asserted that since the producing state was constitutionally entitled to allocate all production ineome to itself, non-producing states could not tax an apportioned share of this same income. To this, the Supreme Court replied: We do not agree. As was the case with income from intangibles, there is nothing “talismanie” about the concept of situs for income from exploration and production of erude oil and gas. Presumably, the States in which appellant’s crude oil and gas produe- tion is located are permitted to tax in some manner the income derived from that production, there being an obvious nexus between the taxpayer and those States. However, “there is no reason in theory why that power should be exclusive when the [exploration and production income as distinguished through sep- arate functional accounting] refleet[s] income from a unitary business, part of which is condueted in other States. In that situation, the income bears relation to benefits and privileges conferred by sev- eral States. These are the cireumstances in which apportionment is ordinarily the accepted method.” In short, the Commerce Clause does not require that any income which a taxpayer is able to separate through accounting methods and attribute to explo- ration and production of erude oil and gas be allo- eated to the States in which those production centers are located. The geographic location of such raw materials does not alter the fact that such income is part of the unitary business of the interstate enterprise and is subject to fair apportionment among all States to which there is a sufficient nexus with the interstate activities of the business. 447 U.S. at 229-30, 65 L. Ed. 2d at 85 (emphasis added; citations omitted). Basically, both the oil companies and the state view Japan Line, Mobil and Exxon as prohibiting allocation of oli production income entirely to the situs state. The debate focuses on whether the Oil Tax allocates all oil production income to Aiaska, as the oil companies con- tend, or is instead a distinet method of dividing the production income, as the state contends. Because we hold that the Oil Tax is a distinet method of dividing oil production income by use of separate accounting, its constitutional validity is not directly determined by these three cases.” While Mobil and Exxon indicate the Court’s strong endorsement of the use of apportionment formulas, the Court clearly implied that the use of separate accounting is constitutionally permissible under the commerce clause.” The constitutional preference for apportionment of “unitary” dividend income in Mobil stemmed from the fact that the two competing methods at issue —- specific allocation and formula apportionment — were “theoreti- *See W. Hellerstein, Memorandum to Mr. Milton Barker (April 20, 1981) (discussing proposed Oil Tax). [Record 17,091] In both Exron and Mobil, the Court stated that separate account- ing “is not constitutionally required.” Exxon, 447 U.S. at 223, 65 L. Ed. 2d at 81; Mobil, 445 U.S. at 438, 63 L. Ed. 2d at 521. 36a cally incommensurate.” Mobil, 445 U.S. at 444, 63 L. Ed. 2d at. 525." The type of duplicative taxation found unacceptable in Japan Line, Exxon and Mobil all fnvolved one taxing jurisdiction using the specific allocation by situs method, while another used apportionment. In other words, one taxing jurisdiction taxed the whole pie, while another taxed a slice. In such a situation, double taxation is inevitable, and one method has to be chosen over another. By contrast, in Moorman Manufacturing v. Bair, 437 U.S. 267, 57 L. Ed. 2d 197, two jurisdictions used different apportionment formulas. Each took only a slice of the pie, but since they used different formulas to divide the pie, the Court recognized that there was high probability of some overlap. While the potential for overlap existed, it certainly was not inevitable, and the Court upheld Iowa’s apportionment method. The Court held that prevention of duplicative taxation should be effected by a national uniform rule for the division of income, but that the “Constitution ...is neutral with respect to the content of any uniform rule.” Jd. at 279, 57 L. Ed. 2d at 208. Given the absence of federal legislation, the Court was unwilling to specify that a particular methodology was constitution- ally preferable. While acknowledging a clear risk of multi- ple taxation in a variety of situations due to the divergence in division-of-income techniques employed by the various states, the Court found such risk preferable to choosing one technique as constitutionally superior to another. Jd. at 278-80, 57 L. Ed. 2d at 207-09. The oil companies in the present litigation acknowledge that Moorman evidenced the Supreme Court’s high degree of tolerance for apportionment formulas. But in their See W. Hellerstein, supra note 48, at 2. [Record 17,093] 37a view, this tolerance does not extend beyond the apportion- ment method. They claim that Moorman does not sanction the use of Alaska’s Oil Tax because the tax is not appor- tioned. We disagree. First, as we have previously ex- plained, the Oil Tax utilizes a division-of-income method. Second, while Mcorman pertained to the _ conflict presented when two jurisdictions employ different types of formula apportionment, the principle of the opinion was that non-uniform state taxes are inevitable and con- stitutionally permissible. Since Moorman, the Court has continued to maintain that states enjoy broad leeway in their choice of division-of-inecome methods. See Container Corp. of America v. Franchise Tax Board, 463 U.S. at 164, 77 L. Ed. 2d at 552. Container Corp. closely resembles the situation in this ease. In Container Corp., California sought to determine its share of total income by use of formulary apportion- ment, while foreign jurisdictions employed separate ac- counting.” Discussing discrimination against interstate ecommerce, the Court reiterated its view that the Constitu- tion does not require the elimination of all overlapping taxation on the interstate level. 463 U.S. at 171, 77 L. Ed. 2d at 557. Thus, if the problem were limited to the interstate level, “the fact that different jurisdictions ap- plied different methods of taxation... would probably make little constitutional difference.” 463 U.S. at 185, 77 L. Ed. 2d at 566. v In Container Corp., the Court faced the additional complication of international commerce. Even so, the Court upheld the tax, distinguishing Japan Line on the ground that Japan’s specific alloeation by situs method necessarily resuited in double taxation. a ‘ , : , See discussion supra section IV. B. 38a Here, by contrast, we are faced with two distinct methods of allocating the income of a multi-national enterprise. The ‘“arm’s-length” approach [i.e., sepa- rate accounting] divides the pie on the basis of formal accounting principles. The formula apportion- ment method divides the same pie on the basis of a mathematical generalization. Whether the combina- tion of the two methods results in the same income being taxed twice or in some portion of income not being taxed at all is dependent solely on the facts of the individual ease. 463 U.S. at 188, 77 L. Ed. 2d at 568 (footnote omitted). The Court held that the two taxing methods do “not ereate an automatic ‘asymmetry’.” Id. at 194-95, 77 L. Ed. 2d at 572. “[I]t would be perverse, [therefore,| simply for the sake of avoiding double taxation, to require Cali- fornia to give up one allocation method that sometimes results in deuble taxation in favor of another allocation method that also sometimes results in double taxation.” Id. at 1938, 77 L. Ed. 2d at 571. The fact that the Court found the two methods could coexist on the international level, where duplicative taxation is viewed more strictly, makes separate accounting a quite permissible alternative when only interstate commerce is involved, as is the case in the present litigation. The Supreme Court has repeatedly recognized that neither separate accounting nor formula apportionment will result in the attribution of the exact amount of income earned in the state to that particular state. Some multiple taxation may result when one jurisdiction em- ploys one method and another uses a different approach. This threat is inherent in any system where state attribu- tion methods are nonuniform. But a state does not offend the commerce clause merely because its method of divid- 39a ing income is different from that of its neighbors. Moor- man Manufacturing v. Bair, 4387 U.S. at 278-80, 57 L. Ed. 2d at 208-09. We have already explained that the separate account- ing method employed by the State of Alaska does not tax all profits generated from Alaskan oil production and does not impermissibly attribute extraterritorial values to Alaska. Using the leeway it retains absent a federal uniform approach, the Alaska legislature chose a constitu- tionally permissible method of income division, albeit not the one “ordinarily” employed for most other types of unitary businesses. We hold that the Oil Tax comports with the require- ments of the Complete Auto Transit test and creates no impermissible burden on interstate commerce. The loca- tion of the oil fields in Prudhoe Bay creates a substantial ‘nexus’ between the oil companies’ activities and the State of Alaska.” As discussed above, the Oil Tax is fairly apportioned to represent only that part of the companies’ income generated from its Alaskan activities — oil and gas production and transportation. As in Container Corp., the Oil Tax does not inevitably result in multiple taxation. Moreover, any possible overlap created by Alaska’s use of separate accounting and other jurisdictions’ use of differ- ent income division methods is not the fault, in the constitutional sense, of Alaska. Thus, the Oil Tax does not discriminate against interstate commerce. Finally, be- cause the oil companies all benefit from the “substantial 52 oy _ . ’ 2 wd ' +). id =< See Exxon v. Wisconsin Dep't of Revenue, 447 U.S. at 229, 65 L. Ed. 2d at 85. 40a privilege’ of extracting oil in Alaska, the Oil Tax is fairly related to services provided in the state. D. Federal and State Equal Protection f The oil companies assert that the Oil Tax violates both state and federal equal protection since it ‘arbitrarily [and] irrationally subject[s] a special group of taxpayers to treatment not accorded taxpayers at large.” They argue, in effect, that using a distinet method of taxation for multistate oil companies, but not for any other unitary businesses, violates equal protection. We reject the oil companies’ equal protection challenge. The analysis under Alaska’s equal protection clause involves a three-step process. Alaska Pacific Assurance v. Brown, 687 P.2d 264, 269-70 (Alaska 1984) [hereinafter eited as ALPAC]; State v. Ostrosky, 667 P.2d 1184, 1192- 94 (Alaska 1983), appeal dismissed, ___. U.S. , 81 L. Ed. 2d 339 (1984); State v. Erickson, 574 P.2d 1, 11-12 (Alaska 1978). First, in order to ascertain the appropri- ate level of review, the nature of the constitutional inter- est affected must be identified. ALPAC, 687 P.2d at 269. Next, the validity of the statutes’ purpose must be ane- lyzed in light of the interest impinged. 7d. Lastly, the means chosen must be examined, also in light of the 53 See Commonwealth Edison v. Montana, 453 U.S. at 628-29, 69 L. Ed. 2d at 901. In determining questions of equal protection under the Alaska Constitution, we employ a single test. As we stated in State v. Erickson, 574 P.2d 1, 12 (Alaska 1978): Such a test will be flexible and dependent upon the importance of the rights involved. Based on the nature of the right, a greater or lesser burden will be placed on the state to show that the classification has a fair and substantial relation to a legitimate governmental objective. 4la interest, to insure that they are sufficiently related to the goals of the statute. Jd. at 269-70. The interest involved here, freedom from disparate taxation, lies at the low end of the continuum of interests protected by the equal protection clause.” Regarding the statute’s purpose, the oil companies claim that greed and other improper motives led the Alaska legislature to enact the Oil Tax. The state, however, has adequately estab- lished that a primary purpose of the Oil Tax was to rectify a perceived underestimation of oil production and pipe- line transportation income that occurred with the applica- tion of an apportionment formula. The goal was to insure that the tax rate assessed to the oil companies on this income was commensurate with the rate applicable to the income of other corporations in the state. Ch. 110, $1, SLA 1978. Taxing the oil companies differently to rectify a pereeived inequity was the legislature’s attempt to prevent disparate treatment; thus, the validity of this purpose in light of the companies’ interest is established. Finally, the means chosen were sufficiently related to the goals of the legislation. The use of separate accounting, rather than formula apportionment, increased the amount of production and transportation income subject to Alaska taxation and more fairly represented the extent of the business activities of the oil companies in Alaska. The Oil Tax did not adversely affect any fundamental interest, nor did it contain a suspect classification. Thus, to be upheld under the federal analysis, it need only to have been rationally related to a legitimate state interest. Exxon v. Eagerton, 462 U.S. 176, 195-96, 76 L. Ed. 2d 497, 513 (1983). The rational basis standard is particularly 55 See Regan v. Taxation with Representation of Washington, 461 U.S. 540, 547, 76 L. Ed. 2d 129, 138 (1983). See generally P. Hartman, supra note 8, § 3.1, at 131-38. 42a easy to meet in the area of taxation. The United States Supreme Court has stated that “[l]egislatures have espe- cially broad latitude in ereating classifications and dis- tinetions in tax statutes.” Regan v. Taxation with Representation of Washington, 461 U.S. 540, 547, 76° L. Ed. 2d 129, 138 (1983). The Oil Tax clearly bore a rational relationship to the state’s goal of correcting a perceived inequity in the tax structure. While the oil companies dispute the underlying premise that the Oi! Tax reetifies inequities, the legislature could have reasonably coneluded that the Oil Tax would more accurately compute the companies’ income generated in Alaska. Thus, the Oil Tax survives the equal protection challenge, under both the "'nited States and the Alaska Constitutions. E. Contract Clause The oil companies argue that the Oil Tax is invalid because it impairs the obligation of the state's ea) contracts with them.”® They contend that the tax increases the state’s share under the lease contracts, and that such modification of the terms of the leases violates the con- tract clause of the United States Constitution.” e This argument is without merit. No lease provision has been impaired. In entering into the leases the state could *Beginning in 1964 the state entered into lease contracts With the oil companies, whereby the state sold the companies whatever gas and oil might be found on the leaseholds in exchange for “bonus” payments and royalties of 12%. ‘No State shali... pass any... Law impairing the Obligation of Contracts....’ U.S. Const., art. I, § 10, el. 1. 43a not,” and did not, contract away its power as a sovereign to tax income earned in the state. Merrion v. Jicarilla Apache Tribe, 455 U.S. 130, 71 L. Ed. 2d 21 (1982) disposes of this issue: Contractual arrangements remain subject to subse- quent legislation by the presiding sovereign. Even where the contract at issue requires payment of a royalty for a license or franchise issued by the governmental entity, the government’s power io tax remains unless it “has been specifically surrendered in terms which admit of no other reasonable interpre- tation.” St. Louis v. United R. Co., 210 U.S. 266, 280, 52 L. Ed. 1054, 28 S. Ct. 630 (1908). 455 U.S. at 148, 71 L. Ed. 2d at 36 (citations omitted); see also Exxon v. Eagerton, 462 U.S. at 187-94, 76 L. Ed. 2d at 508-12. Vill. RETROACTIVITY OF THE OIL TAX The Oil Tax Act was signed into law on July 8, 1978.” Section 4 of the Act provided that it would apply retroac- tively to January 1, 1978. Section 5 provided the Act would be “effective” immediately. While the Senate voted 16 to 4 to approve section 5, the entire Oil Tax Act only passed by a vote of 11 to 9. Thus, at no time did more than 11 senators vote to approve section 4. The companies argue that the Act may not constitution- ally be made applicable to income earned prior to July 8, 1978. They interpret article II, § 18 of the Alaska Consti- “The Alaska Constitution provides: “The power of taxation... shall not be... contracted away, except as provided in this article.” Alaska Const. art. LX, § 1. Ch. 110, SLA 1978. d4ta tution” and AS 01.10.070(a)™ as requiring the approval of two-thirds majority of each house of the legislature to give retroactive effect to a new law. The companies argue that even though a two-thirds vote was attained for an immediate effective date, a two-thirds vote was ‘also re- quired to enact section 4, applying the Act retroactively to January 1, 1978. We disagree. AS 01.10.090 states that “[n]o statute is retrospective unless expressly declared therein.”” A two-thirds vote requirement does not appear in that section, nor else- where in Alaska law. The legislature, however, has recog- nized that where retroactive application of a portion or all of a bill is desired, an immediate effective date, which does require a two-thirds vote under article II, § 18 and AS 01.10.070(a), should be used in conjunction with the retroactivity section. Legislative Affairs Agency, Manual of Legislative Drafting 11 (1977); Uniform Rules of the Alaska State Legislature, Rule 10 (May 3, 1977). Acecord- ingly, because two-thirds of the legislature voted to make the Oil Tax Act immediately effective, a separate two- thirds vote for the Act to be retroactive was not constitu- tionally required. The Oil Tax was properly retroactive to January 1, 1978. The superior court’s action in granting the state's motion for summary judgment is AFFIRMED. [Statutory Appendix omitted; see App. C.] Alaska Const. art. II, § 18 provides: Laws passed by the legislature become effective ninety days after enactment. The iegislature may, by concurrence of two- thirds of the membership of each house, provide for another effective date. *TAS 01.10.070(a) contains language paralleling Alaska Const. art. II, $18. 45a Il. Memorandum of Decision and Order Granting Sum- mary Judgment of the Superior Court of the State of Alaska, Third Judicial District, dated May 27, 1983. IN THE SUPERIOR COURT FOR THE STATE OF ALASKA THIRD JUDICIAL DISTRICT No. 3AN 79-1903 ATLANTIC RICHFIELD COMPANY, ET AL., Plaintiffs, Vv. STATE OF ALASKA, ET AL., Defendants. No. 3AN 80-1542 EXXON CORPORATION, ET AL., Counterclaimants, Vv. STATE OF ALASKA, ET AL., Defendants on Counterclaim. MEMORANDUM OF DECISION AND ORDER GRANTING SUMMARY JUDGMENT This ease involves a motion for summary Judgment by the defendant to declare the Oil and Gas Corporate income Tax Act, AS 43.21, constitutional. Counsel have been most helpful in delineating the issues and citing the appropriate authorities. The plaintiffs challenge AS 43.21 on the grounds that it violates the due process, equal protection and commerce elauses of the United States Constitution and the equal protection clause and Art. II, see. 18, Alaska Constitu- 46a tion, and is in violation of AS 43.19, the multistate tax compact. The plaintiffs assert that genuine issues of material fact exist which precludes the grant of a motion for summary judgment. I find that the disputes over the existence of facts do not preclude the grant of summary judgment. Ault v. Alaska State Mortgage Association, 387 P.2d 698, 701 (Alaska 1963). Further, the asserted issues of material fact do not preclude summary judgment in any event because they are facts only in the sense that they provide premises in the process of legal reasoning, they are not that type of faet for which a trial is mandated. A detailed analysis of the statute, its history, and the arguments on both sides could be set forth. However, there is no purpose in reiterating what counsel have so ably done. In addition, the patina of revenue rulings, eases and eeonomiec theories are taken into account with- out explication. The due process challenge is without merit because there is more than a minimal connection between Alaska, the taxing state, and the activities of the taxpayer reached by the taxing statute and the income attributed to Alaska is rationally related to values connected with Alaska (there is no requirement of arithmetical perfection). Mo- bil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425 (1980) and Moorman Manufacturing Co. v. Bair, Director of Reveune of Iowa, 437 U.S. 267 (1978). The plaintiff's equal protection argument is answered by reviewing State v. Erickson, 574 P.2d 1 (Alaska 1978). The state’s approach to taxing income under the statute in question does not violate the equal protection clauses of either the United States or Alaska Constitutions. 47a The commerce clause challenge is overcome if the tax in question is applied to an activity with a substantial contact with the taxing state, the tax is fairly apportioned and if the tax is fairly related to the services provided by the state. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) and Commonwealth Edison Co. v. Montana, 101 S.Ct. 2946 (1980). All of those tests are met in this case. The other points raised by the plaintiffs as precluding the grant of summary judgment are not well taken and, therefore, IT IS ORDERED that the defendant’s motion for summary judgment is granted. DATED at Anchorage, Alaska, this 27th day of May, 1983. /s/ Vietor D. Carlson Vietor D. Carlson Superior Court Judge This is to certify that a copy of the above Memorandum of Decision was mailed on the 27th day of May, 1983 to: Ralph I. Miller, Esq. Robert E. McManus, Esq. William B. Rozell, Esq. Riehard O. Gantz, Esq. George J. Dunn, Esq. O’Melveny & Myers Robert J. Mahoney, Esq. Barry L. Wertz, Esq. Attorney General William L. Lutz, Jr. David A. Nelson, Esq. George J. Dunn, Esq. Barry L. Wertz, Esq. /s/_ Ruth E. Willard Seeretary to Judge Carlson 48a III. Order for Final Judgment of the Superior Court of the State of Alaska, Third Judicial District, dated July 6, 1983 and effective May 27, 1983. f [Caption omitted ] ORDER FOR FINAL JUDGMENT This action having been heard on motion by defendants and defendants on counterelaim, State of Alaska, et al., for summary judgment dismissing all counts of the com- plaints and ecounterelaim herein, and this court having granted defendants motion by order dated May 27, 1983, IT IS HEREBY ORDERED that defendants shall have judgment against plaintiffs and counterclaimants, dismissing all counts of the complaints and eounterelaim herein, and that defendants recover their costs in the amount of $4,000,000 and attorneys fees in the amount of $534,355.54 from plaintiffs and counterclaimants. This judgment is effective 5-27-83. DATED: 7-6-83 /s/Vietor D. Carlson Superior Court Judge [Certification of service omitted | IV. Judgment of the Superior Court of the State of Alaska, Third Judicial District, dated July 5, 1983. [Caption omitted | JUDGMENT The court having granted a motion for summary jJudg- ment on May 27, 1983, judgment consistent therewith is 49a hereby granted pursuant to Rule 58(b) (2), Alaska Rules of Civil Procedure. DATED at Anchorage, Alaska, this 5th day of July, 1983. /s/Vietor D. Carlson Vietor D. Carlson Superior Court Judge [Certification of service omitted | B. NOTICE OF APPEAL. IN THE SUPREME COURT OF THE STATE OF ALASKA Alaska Supreme Court File No. S-52 Opinion No. 2965 Superior Court Nos. 3AN-79-1903 Civil 3AN-80-1542 Civil ATLANTIC RICHFIELD COMPANY, ET AL., Appellants, V. STATE OF ALASKA, ET AL., Appellees. Appeal from the Superior Court Third Judicial District Hon. Victor D. Carlson, Judge NOTICE OF APPEAL TO THE SUPREME COURT OF THE UNITED STATES PLEASE TAKE NOTICE that Exxon Corporation, Exxon Pipeline Company, Atlantie Richfield Company, . ARCO Pipe Line Company, BP Alaska Inc., Sohio Alaska 50a Petroleum Company, and Sohio Pipe Line Company hereby appeal, pursuant to 28 U.S.C. Seetion 1257(2), to the Supreme Court of the United States from the final judgment and decision on appeal in this cage entered by this court on August 16, 1985. DATED this 5th day of November, 1985. O'MELVENY & MYERS JOHN F. DAUM BARTON H. THOMPSON, JR. RICHARD B. GOETZ 400 South Hope Street Los Angeles, CA 90071 BARRY L. WERTZ JANICE L. ROBERTSON EXXON COMPANY, U.S.A. 800 Bell Avenue, 18th Floor Houston, Texas 77002 THOMPSON & KNIGHT J. W. BULLION RALPH I. MILLER 3300 First City Center Dallas, Texas 75201 ROBERT E. MCMANUS ATLANTIC RICHFIELD COMPANY 1601 Bryan St., DAB 19054 Dallas, Texas 75221 HARTIG, RHODES, NORMAN, MAHONEY & EDWARDS ROBERT J. MAHONEY 717 “K” Street, Suite 201 Anchorage, Alaska, 99501 Attorneys for Exxon Corporation and Exxon Pipe Line Company 5la By /s/Robert J. Mahoney Robert J. Mahoney FAULKNER, BANFIELD, DOOGAN & HOLMES WILLIAM B. ROZELL JOHN F. CLouGH, III 302 Gold Street Juneau, Alaska 99801 Attorneys for Atlantic Richfield Company and Areo Pipe Line Company By /s/ William B. Rozell William B. Rozell SQUIRE, SANDERS & DEMPSEY TERRENCE G. PERRIS 1800 Huntington Building Cleveland, Ohio 44115 RICHARD H. HAHN THE STANDARD OIL COMPANY 1725 Midland Bldg. Cleveland, Ohio 44115 HUGHES, THORSNESS, GANTZ, POWELL & BRUNDIN RICHARD QO. GANTZ CARL J.D. BAUMAN 509 West Third Avenue Anchorage, Alaska 99501 Attorneys for Sohio Alaska Petroleum Company, Sohio Pipe Line Company, BP Alaska Ine. By /s/ Carl J.D. Bauman Car! J.D. Bauman 52a AFFIDAVIT OF SERVICE STATE OF ALASKA ) j gs THIRD JUDICIAL DISTRICT f Sally O'Donnell, being first duly sworn on oath, de- poses and says: 1. I am over the age of eighteen years, and not a party to or interested in the within action. My business address is Denali Towers North, 2550 Denali Street, Suite 700, Anchorage, AK 99503-2774. I am employed by Faulkner, Banfield, Doogan & Holmes. 2. On this 6th day of November, 1985, I served the within Notice of Appeal to the Supreme Court of the United States upon all parties required to be served, to- wit, by depositing a true copy thereof in the United States mail box at Anchorage, Alaska, in a sealed envelope with first-class postage prepaid and addressed to counsel of record as follows: Deborah Vogt Harold Brown Assistant Attorney Attorney General General State Capital State Capitol Pouch K Poueh K Juneau, Alaska 99811 Juneau, Alaska 99811 /s/_ Sally O'Donnell SUBSCRIBED & SWORN TO before me this 6th day of November, 1985. /s/ Jan Cress NOTARY PUBLIC for Alaska. My Commission Expires: October 25, 1988 53a C. CONSTITUTIONAL PROVISIONS, STATUTES AND REGULATIONS. U.S. Constitution, Art. I, Section 8: The Congress shall have Power... To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes. U.S. Constitution, Amendment XIV, § 1: nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any persor within its jurisdiction the equal protection of the laws. AS 43.19.0100, Multistate Tax Compact, Art. IV: 1. As used in this Article, unless the context otherwise requires: (a) “Business income” means income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the aequisi- tion, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations. 9. All business ineome shall be apportioned to this State by multiplying the income by a fraction, the numer- ator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three. AS 43.20, Net Income Taz Act: See. 43.20.011(e). There is imposed for each taxable year upon the entire taxable income of every corporation 54a derived from sources within the state a tax consisting of a normal tax equal to 5.4 pereent of taxable income, and a surtax which is equal to 4.0 percent of taxable income, except that the tax on a corporation doing business in the state which derives income from the production or pipe- line transportation of crude oil or natural gas in the state shall be determined and paid in aecordance with AS 43.21. See. 43.20.065. Allocation and apportionment. A tax- payer who has income from business activity which is taxable both inside and outside the state or income from other sources both inside and outside the state shall allocate and apportion his net income as provided in the Multistate Tax Compact (AS 43.19), or as provided by this chapter. AS 43.21, Oil and Gas Corporate Income Taz: See. 43.21.010. Appheation. This chapter applies to every corporation doing business in the state which de- rives income from the production of oil or gas from a lease or property in the state or from the pipeline transporta- tion of oil or gas in the state. The tax caleulated under this chapter is measured by the total taxable income of the corporation during the tax period as determined under AS 43.21.020-43.21.040 and is caleulated at the rates established under AS 43.20.011(e). See. 43.21.020. Determination of taxable income from oil and gas production. (a) The taxable income of a corporation from the production of oil and gas from a lease or property in the state shall be the corporation's net income as calculated by the department in accordance with this section. (b) Gross ineome of a corporation from oil and gas production shall be the gross value at the point of produc- 55a tion of oil or gas produced from a lease or property in the state. The department shall by regulation determine a uniform method of establishing the gross value at the point of production. In making its determination the department may use the actual prices or values received for the oil or gas, the posted prices for the oil or gas in the same field, or the prevailing prices or values of oil or gas in the same field. In addition, in its determination of gross value at the point of production of oil or gas produced from a lease or property, the department shall determine the reasonable costs of transportation from the point of sale to the point of production of the oil or gas. Transportation costs set by a tariff properly on file with the Alaska Pipeline Commission or other regulatory agency shall be considered prima facie reasonable, but if a tariff properly on file with a regulatory agency is subse- quently amended, changed, or overturned retroactively, the reasonable costs of transportation shall be recom- puted for that period using the newly determined tariff. (c) Net income from oil and gas production shall be determined by the department by deducting from gross income the following: (1) royalties paid in kind or in value; (2) taxes imposed under AS 43.55 and AS 43.57 which are actually paid or ineurred by the corpora- tion on the production from a lease or property in the state; (3) taxes imposed under AS 43.56 and AS 29.53 which are actually paid or incurred by the corpora- tion on property used directly in the production of oil or gas from a lease or property in the state, including property used in production, gathering, treatment or preparation of the oil or gas for pipeline transporta- tion, but only if those property tax payments were 56a due and payable only after the date of commercial production from the lease or property with which the property was associated; (4) the direct costs ineurred by or for the corpora- tion in operating the lease or property, including the direct costs of producing, gathering, treating or pre- paring the oil or gas for pipeline transportation, but net of any payments received for those activities and not ineluding any indirect cost or overhead expense; (5) depreciation (using the unit of production method or such other reasonable methods as the department may by regulation establish) on property used directly in the production, gathering, treatment or preparation of the oil or gas for pipeline transpor- tation including amortization of capitalized interest for investments in this property at a rate not to exceed the average cost of borrowed capital to the taxpayer during the year in which it is eapitalized; (6) the amortization of lease acquisition payments and taxes paid or ineurred under AS 43.56 and AS 29.53 (ineluding eapitalized interest on both) for or on producing properties before the commencement of commercial production from the lease or property for which the property is being used; (7) interest expense of the corporation not ecapi- talized during construction, that was paid or in- curred in connection with property in Alaska; however, unless (f) of this seetion applies, the inter- est expenses may not exceed that portion of the total interest paid by the consolidated business of which the corporation is a part, determined by multiplying the total interest by a fraction, the numerator of which is the value of the ecorporation’s real and tangible personal property used directly in the pro- 57a duction of oil or gas from a lease or property in the state and the denominator of which is the value of all real and tangible personal property of the consoli- dated business; in this subsection, ‘total interest paid by the eonsolidated business” does not inelude interest expense arising from intercompany obliga- tions within the consolidated business except to the extent that the interest expense reflects a pass- through of interest on a third-party borrowing by the parent or other member of the consolidated business with the purpose, expressed at the time of the third- party borrowing, of financing Alaska business activ- ity of the taxpayer corporation; (8) expenses ineurred by the corporation after December 31, 1977 of unsuccessful exploration of oil or gas in the state including the acquisition costs of abandoned properties, dry hole costs, and the cost of geologic and geophysical exploration related to those abandoned properties; (9) general overhead or administrative expense ineurred by the corporation attributable to deriving income from the production of oil or gas from a lease or property in the state to the extent, except as provided in (f) of this section, that it does not exceed that portion of the total general overhead or adminis- trative expense ineurred by the consolidated busi- ness of which the corporation is a part, determined by multiplying the total general overhead or adminis- trative expense by a fraction, the numerator of which is the value of the ecorporation’s real and tangible personal property used directly in the production of oil or gas from a lease or property in the state and the denominator of which is the value of all real and 58a tangible personal property of the consolidated business; (10) the amount of income from the production of oil and gas from a lease or property that is divided among the regional Native corporations under see. 7(i) of the Alaska Native Claims Settlement Act (P.L. 92-203); (11) the tax imposed by see. 4986 of the Internal Revenue Code that is paid or incurred by the tax- payer for oil production from leases or properties in the state. (d) Deductions from gross income under this section shall not inelude expenses previously dedueted on a return filed under AS 43.20. (e) Where a corporation subject to this chapter shares the production or proceeds of the production from a lease or property through a working interest, royalty interest, overriding royalty interest, production payment, net profit interest, joint venture or other agreement, the department shall allocate the deductions from gross in- eome between the corporation and the persons with whom it has such an agreement in accordance with the terms of the agreement. (f) If a corporation demonstrates to the satisfaction of the department that it paid or incurred actual expenses for interest or for general overhead or administration attributable to deriving income from the production of oil or gas from a lease or property in the state in an amount greater than the amount determined under (¢)(7) or (c)(9) of this section, the department may allow the corporation to deduct the greater amount. See. 43.21.0830. Determination of income from oil and gas pipeline transportation. (a) Except as provided in 59a (ec) of this seetion, taxable income attributable to the transportation of oil in a pipeline engaged in interstate commerce in Alaska shall be determined by the depart- ment and shall be the amount reported or that would be required to be reported to the Federal Energy Regulatory Commission or its suecessors as net operating income, less those portions of interest and general administrative expense attributable to the pipeline transportation of oil in the state, except that taxable income shall also inelude taxes on or measured by income. The department shall establish regulations governing the determination of in- terest and general administrative expense attributable to pipeline transportation of oil in the state. (b) Exeept as provided in (c) of this section, taxable income attributable to the transportation of natural gas in a pipeline engaged in interstate commerce in Alaska shall be determined by the department and shall be the amount reported or that would be required to be reported to the Federal Energy Regulatory Commission as net operating income less that portion of interest and general adminis- trative expense attributabie to pipeline transportation in the state, except that the taxable income shall also in- clude taxes on or measured by income. The department shall establish regulations governing the determination of interest and general administrative expense attributable to pipeline transportation of natural gas in the state. (c) Taxable income attributable to the transportation of oil or natural gas in Alaska of any corporation not under the Federal Regulatory Commission jurisdiction, or of a corporation under the jurisdiction of the Federal Energy Regulatory Commission but not reporting the operation of pipelines in Alaska separately from the operation of pipelines elsewhere, shall be determined by the department and shall be based upon an amount equal 60a to that which would have been reported to the Federal Energy Regulatory Commission under (a) of this section in the ease of oil pipelines, or (b) of this section in the ease of natural gas pipelines, had the corporation been, in facet, under Federal Energy Regulatory C ommission juris- diction for the taxable year and required to report on the operation of Alaska pipeline separately from the opera- ion of pipelines elsewhere. See. 43.21.040. Determination of income from activi- ties other than oil and gas production or pipeline trans- portation. (a) Taxable income of a corporation subject to this chapter form activities in this state other than the production of oil or gas from a lease or property in the state or the pipeline transportation of oil or gas in the state shall be determined in accordance with the method established in art. IV of AS 48.19.010 and in AS 43.20.071, as modified by (b) — (f) of this seetion. (b) The total taxable income of the consolidated busi- ness is its entire income less the portion of that entire income attributable to woridwide production and pipeline transportation of oil and gas. In this section, (1) for a member of a consolidated business who is required to file under the Internal Revenue Code, ‘entire income” means taxable income under Subtitle F and chapter 1 of Subtitle A of the Internal Reve- nue Code of 1954, as amended, except that those provisions adopted after December 51, 1975, which change or modify exemptions from tax are not adopted by reference as a part of this section until the second January 1 following the effective date of the federal law; (2) for a member of a consolidated business who is not required to file under the Internal Revenue Code, “entire income’ means book income, except that a 6la taxpayer may elect to report his income as the in- come would be determined under (1) of this subsection. (ec) The numerator and denominator of the property factor, of the payroll factor and of the sales factor shall be calculated without reference to that portion of property, payroll or sales directly related to the production of oil or gas from a lease of property in the state or the pipeline transportation of oil or gas in the state. (d) The value attributed to vessels transporting Alas- kan oil or gas of the consolidated business which are not owned or effectively owned by the consolidated business shail be exeluded from the property factor. See. 43.21.050. Assessment of income and tax. (a) The department shall assess taxable income and the amount of tax payable on that taxable income. (b) On or before August 15 of each year the depar* ment shall send to every corporation taxable under this chapter a notice of assessment showing the amount of income taxable under this chapter for the previous year and the amount of tax payable on that taxable income. (ec) For purposes of this chapter the department may eombine taxable incomes of corporations subject to tax under this chapter who are part of the same consolidated business. (d) If the methods of allocation and apportionment provided in this chapter do not fairly represent the extent of a ecorporation’s business activity in the state, the corporation may petition for or the department may require, in respect to all or any part of the corporation’s business activity, if reasonable, the employment of any method authorized under art. IV, see. 18, of the multi- state tax compact (AS 43.19.010) to effectuate an equita- 62a ble allocation and apportionment of a corporation’s income. The commissioner shall inelude in his annual report required in AS 43.21.110 a report on all relief granted under this subsection, including for, each case a statement of the changes in tax liability resulting from the granting of relief, the tax years involved, and a description of the method of determining taxable income that was substituted for those provided in this chapter. See. 43.21.060. Returns. On or before April 15 of each year, a corporation subject to tax under this chapter shall submit a return in a form preseribed by the depart- ment setting out information required by the department to determine taxable income. For purposes of this echap- ter, the department may require corporations subject to tax under this chapter who are part of the same consoli- dated business to file a single return. See. 43.21.070. Payment of tax. The tax levied under this chapter is payable to the department; on or before September 30 of each year or in installments, including prepayments of estimated tax, at the times and under the eonditions the department may by regulation require. This tax is payable on the due date set out in this section even though the assessment is under appeal or the valid- ity, enforceability or application of this chapter or any provision of this chapter is challenged before the depart- ment or in the courts. See. 43.21.080. Transitional rules. The department shall provide by regulation transition rules for corpora- tions subject to tax under ch. 20 of this title before the effective date of this Act to avoid double taxation of the same income or double deduction of the same expense of those corporations as a result of becoming subject to tax under this chapter. 63a See. 43.21.090. Regulations. The department may adopt regulations in accordance with the Administrative Procedure Act (AS 44.62) as appropriate to administer and enforce this chapter. See. 43.21.100. Penalties. The penalties established in ch. 20 of this title apply to this chapter. See. 43.21.110. Publie reporting. (a) The commis- sioner of revenue shall compile and transmit to the legis- lature an annual consolidated report of state revenues and taxation policies under this chapter. This report shall include total aggregate income tax paid by corporations eovered under this chapter and aggregate income and deductions by eategory, so classified as to prevent the identification of particular returns or reports. (b) The legislative auditor shall transmit to the legisla- ture an annual report reviewing the actions of the depart- ment in administering this chapter. See. 43.21.120. Definitions. Unless the context re- quires otherwise the definitions contained in AS 43.55.140 are applicable to this chapter. In addition, in this chapter (1) “base of operations” means the closest point on land to the offshore oil or gas production opera- tions from which goods, services and supplies flow to those offshore oil or gas production operations; (2) “eonsolidated business” means a corporation or group of corporations having more than 50 percent common ownership, direct or indirect, or a group of corporations in which there is common control either direct or indirect as evidenced by any arrangement, contract or agreement. AS 44.62.240: ey —————————————eeEe 64a If a regulation adopted by any agency under this chapter is primarily legislative, the regulation has pro- spective effect only. A regulation adopted under this chapter, which is primarily an “interpretative regulation, ” has retroactive effect only if the ageney adopting it has adopted no earlier inconsistent regulation and has fol- lowed no earlier course of conduct ineonsistent with the regulation. Silence or failure to follow any course of conduct is considered earlier inconsistent conduct. AS 44.62.640: In AS 44.62.010—44.62.320, unless the context other- wise requires, (2) “regulation” means every rule, regulation, order, or standard of general application or the amendment, supplement or revision of a rule, regulation, order or standard adopted by a state agency to implement, inter- pret, or make specific the law enforced or administered by it, or to govern its procedure, except one which relates only to the internal management of a state agency; “regu- lation” does not inelude a form prescribed by a state agency or instructions relating to the use of the form, but needed to implement the law under which the form is issued; “regulation” ineludes “manuals,” “policies,” “‘in- structions,” “guides to enforcement,” “interpretative bul- letins,” “interpretations,” and the like, which have the effect of rules, orders, regulations or standards of general application, and this and similar phraseology shall not be used to avoid or ecireumvent this chapter; whether a regulation, regardless of name, is covered by this chapter depends in part on whether it affeets the public or is used by the ageney in dealing with the public. ed 65a CHAPTER 21. OIL AND GAS CORPORATE INCOME TAX REGULATIONS Article 1. Application of Tax (15 AAC 21.001 — 15 AAC 21.090) 2. Taxable Income from Oil and Gas Production (15 AAC 21.100 — 15 AAC 21.290) 3. Taxable Income from Oil and Gas Pipelines (15 AAC 21.300 — 15 AAC 21.490) 4. Taxable Income Apportioned to Alaska (15 AAC 21.500 — 15 AAC 21.590) Transition Rules (15 AAC 21.600 — 15 AAC 21.690) 6. Administration (15 AAC 21.700 — 15 AAC 21.890) General Provisions (15 AAC 21.900 — 15 AAC 21.9790) ~ i) ARTICLE 1. APPLICATION OF TAX Section l. Findings of fact 3. Determinations based on findings of fact 9 Requirement of alternative allocation and apportionment method 10. Persons subject to this chapter 20. Taxpayers having income from other activities 30. Consolidated businesses 40. Attribution of income 50. Net taxable income 60. Surtax exemption 65. Tax rates 70. Treatment of net losses realized under this chapter 80. (Reserved) 90. (Reserved) 15 AAC 21.001. FINDINGS OF FACT. Based upon the entire legislative history culminating in the passage of 66a eh. 110, SLA 1978, and also the legislative history of ch. 113, SLA 1980, and ech. 116, SLA 1981, and, after review- ing in depth the tax returns of corporations engaged in oil and gas production or pipeline transportation jn the state, the department finds that (1) the three-factor formula set out in AS 43.19.010, Art. IV, does not fairly or fully represent the income- producing activity in the state or the income earned in the state of corporations engaged in oil and gas production or pipeline transportation in the state; (2) specifieally, the property factor, payroll factor, and sales faetor in combination do not accurately represent the value of aetivity relating to or associated with the extraction and transportation of nonrenewable resources of oil and gas in the state; and (3) the application of the three-factor formula in AS 3.19.010, Art. IV, results in a total distortion of the income-produeing activities and income earned by corpo- rations engaged in oil and gas production and pipeline transportation because little weight is given to the tre- mendous raw wealth represented by the oil and gas produced from a lease or property in the state or trans- ported in the state, or both. (Eff. 2/22/79, Reg. 69; am 5/21/81, Reg. 78; am 3/26/82, Reg. 81) Authority: AS 43.05.010; AS 43.05.080; AS 43.19.010 (Art. IV, see. 18); AS 43.20.065; AS 44.25.020. 15 AAC 21.063. DETERMINATIONS BASED ON FINDINGS OF FACT. Under AS 43.19.010, Art. IV, see. 18, and based upon the findings contained in 15 AAC 21.001 for the purpose of the tax imposed under AS 43.21, the department has determined that (1) the alloeation and apportionment provisions of AS 43.19.010, Art. IV, sees. 1-17, do not fairly or fully 67a represent the extent of a corporation’s business activities in the state with respect to the production or pipeline transportation of oil or gas in the state; and (2) the method of alloeation and apportionment adopted by the legislature in AS 43.21 more accurately represents the extent of business activity of corporations engaged in oil and gas production, pipeline transporta- tion, or both, in the state, than do the allocation and apportionment provisions of AS 43.19.010, Art. IV, sees. 1-17. (Eff. 2/22/79, Reg. 69; am 5/21/81, Reg. 78; am 3/26/82, Reg. 81) Authority: AS 43.05.010; AS 43.05.080; AS 43.19.010 (Art. IV, see. 18); AS 43.20.065; AS 44.25.020. 15 AAC 21.005. REQUIREMENT OF ALTERNA- TIVE ALLOCATION AND APPORTIONMENT METHOD. Pursuant to AS 43.19.0100, Art IV, see. 18, and based upon the findings and determinations in 15 AAC 21.001 and 15 AAC 21.003, a corporation doing business in the state which derives income from the production of oil or gas from a lease or property in the state, or from the pipeline transportation of oil or gas in the state, or both, shall compute its income under the methods prescribed in AS 43.21 and this chapter. (Eff. 2/22/79, Reg. 69; am 5/21/81, Reg. 78) Authority: AS 43.05.010; AS 43.05.080; AS 43.19.010 (Art. IV, See. 18); AS 43.20.065; AS 44.25.020 15 AAC 21.010. PERSONS SUBJECT TO THIS CHAPTER. (a) A corporation doing business in the state and deriving income from one or more of the following souces is subject to the provisions of this chapter, even if that income is more than offset during a year by expenses associated with it: 68a (1) a production interest in one or more leases or properties in commercial production that are within the state; or (2) repealed 5/21/81; t (3) the transportation of oil or gas or both by means of a pipeline or pipeline system of which part or all is within the state. (b) The right under see. 7(i) of the Alaska Native Claims Settlement Act to share in revenue from oil or gas production from a regional Native corporation's land is not-a production interest in that property, and therefore a corporation deriving income from oil and gas production solely by virtue of sees. 7(i) and 7(}) of the Alaska Native Claims Settlement Act is not subject to the provisions of this chapter. (Eff. 2/22/79, Reg. 69; am 5/21/81, Reg. 78; am 3/26/82, Reg. 81) Authority: AS 43.05.010; AS 43.05.080; AS 43.19.010 (Art. IV, see. 18); AS 43.21.010; AS 43.21.020; AS 43.21.090; AS 44.25.020. 15 AAC 21.020. TAXPAYERS HAVING INCOME FROM OTHER ACTIVITIES. A taxpayer deriving in- come from one or more sources in addition to any of those listed in 15 AAC 21.010 is subject to the requirements and income tax liability under AS 43.21 and this chapter only, for all of its income. (Eff. 2/22/79, Reg. 69) Authority: AS 43.05.080; AS 43.19.010 (Art. IV, see. 18); AS 43.20.011; AS 43.21.010; AS 43.21.040; AS 43.21.090. 15 AAC 21.030. CONSOLIDATED BUSINESS. (a) A group of two or more corporations that are directly or indirectly controlled or more than 50-perecent »wned (di- rectly or through one or more intermediaries) by one 69a common person (corporate or otherwise) is a consoli- dated business for purposes of this chapter. (b) The ineome, expenses, and assets of a consolidated business inelude, respectively, ail ineeme, expenses and assets attributed to it under 15 AAC 21.040. (ec) If a corporation or consolidated business is con- trolled (by a means characteristic of ownership rather than through the exercise of general governmental powers such as laws, regulations, judicial decisions, proclama- tions, and the like) or more than 50-percent owned by a sovereign, head of state, government or governmental agency, the consolidated business does not include the sovereign, head of state, government or governmental ageney for purposes of this chapter. (Eff. 2/22/79, Reg. 69; am 5/21/81, Reg. 78) Authority: AS 43.05.080; AS 43.19.010 (Art. IV, see. 18); AS 43.21.050; AS 43.21.090; AS 43.21.120. 15 AAC 21.040. ATTRIBUTION OF INCOME. (a) The income, expenses and assets of an enterprise involving undivided joint ownership must be attributed to the joint owners of that enterprise on the basis of their respective ownership interests, as may be modified by agreement among those joint owners. For purposes of this section, partnerships, joint ventures, trusts with joint benefi- ciaries and similar legal entities (but not a corporation) are enterprises involving undivided joint ownership. (b) If a eorporation doing business in the state con- duets, through one or more noncorporate intermediaries, operations that generate income for those intermediaries which would make them subject to tax under AS 43.21 and this chapter if they were corporations, then that corporation is presumed to derive income from those operations in the amount of the income earned by those 70a intermediaries and therefore subject to tax under this chapter. Such a corporation’s tax is calculated using the revenues and deductions of the intermediaries, as if the corporation were directly conducting the operations actu- ally conducted by the intermediaries. (Eff. 2/22/79, Reg. 69) Authority: AS 43.05.080; AS 43.19.010 (Art. IV, see. 18); AS 43.21.050; AS 43.21.090; AS 43.21.120. 15 AAC 21.050. NET TAXABLE INCOME. (a) A taxpayer's 5.4-percent tax and 4-percent surtax under AS 43.21 and this chapter for a year are on the taxpayer’s net taxable income for that year as determined under (b) of this section, except that the surtax will be computed on that net taxable income minus the surtax exemption specified in 15 AAC 21.060. (b) A taxpayer’s net taxable income for a year is that taxpayer’s taxable production income under 15 AAC 21.100 for that year, plus that taxpayer’s taxable oil pipeline income under 15 AAC 21.300 for that year, plus that taxpayer’s taxable gas pipeline income under 15 AAC 21.400 for that year, plus that taxpayer’s taxable appor- tioned income under 15 AAC 21.500 for that year, and minus all net losses of that taxpayer that are being car [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/documents/brief%3Amicro_IA40385017_0286%3A2. Public record. Not legal advice.