April 23, 2008
SCOTUS MeadWestvaco decision is victory for business taxpayers. But do the States still have alternative theories to tax?
Last week's U.S. Supreme Court decision in MeadWestvaco Corp. v. Illinois Dep't of Revenue, 553 U.S. ___, No. 06–1413 (April 15, 2008) was a victory for business taxpayers--especially for corporations operating in several U.S. states. As WAC? pointed out in a January 16 post on the day of oral arguments, the Illinois Appellate Court went well beyond the clearly established constitutional limits in allowing Illinois to tax part of a capital gain resulting from a $1.5 billion sale by Mead in 1994 of Lexis/Nexis. See background and facts here. The Court took a similar view.
In MeadWestvaco, a unanimous decision written by Justice Alito, the Court upheld its long line of cases holding that the "unitary business principle" sets limitations on a state’s ability to tax:
If the value the State wished to tax derived from a "unitary business" operated within and without the State, the State could tax an apportioned share of the value of that business instead of isolating the value attributable to the operation of the business within the State. Conversely, if the value the State wished to tax derived from a "discrete business enterprise," then the State could not tax even an apportioned share of that value.
Slip op. at 8-9 (citations omitted).
The Court rejected the Illinois Appellate Court’s analysis of the unitary business principle outright: "In our view, the state courts erred in considering whether Lexis served an 'operational purpose' in Mead’s business after determining that Lexis and Mead were not unitary." Id. at 6. The Court explained that in particular the Illinois Appellate Court misapplied the Court’s earlier cases. Illinois’ result would expand the Court’s longstanding unitary business principle:
As the foregoing history confirms, our references to "operational function" in Container Corp. and Allied-Signal were not intended to modify the unitary business principle by adding a new ground for apportionment. The concept of operational function simply recognizes that an asset can be part of a taxpayer’s unitary business even if what we may term a "unitary relationship" does not exist between the "payor and payee".
Id. at 11-12 (citations omitted).
For example, the Court explained, a taxpayer is not generally unitary with its banker, but the taxpayer’s deposits (which represent working capital and thus operational assets) can be clearly unitary with the taxpayer’s business.
The Court vacated and remanded the Illinois Appellate Court’s decision that had allowed imposition of the Illinois tax.
The Court also declined to decide an issue raised too late by Illinois and its amici that invited the Court to "recognize a new ground for the constitutional apportionment of intangibles based on the taxing State’s contacts with the capital asset rather than the taxpayer". Id. at 13.
In a somewhat cryptic concurring opinion, Justice Thomas wrote separately "to express my serious doubt that the Constitution permits us to adjudicate cases in this area."
After MeadWestvaco, the unitary business principle remains a solid limitation on the states' power and ability to tax. But the "new" grounds for taxation--based on "contacts with the capital asset" sold--will likely be raised again. This late-raised amici position, coupled with the puzzling concurring opinion of Justice Thomas, will keep alternative constitutional state tax issues alive for the foreseeable future.
Future challenges by the States can be expected.
Posted by Julie McGuire and Dan Hull at April 23, 2008 11:59 PM
I've read with great interest both of your blogs, discovering them while conducting a search of attorneys in Pittsburgh. I am, by the way, a legal recruiter so my intent, alas, is not only to compliment you on your blogs but to see if either or both of you would have interest in making a move. We represent 10 of the top 20 firms in the U.S., plus an abundance of others.
Posted by: Judith at May 1, 2008 01:18 PM
First time we've been recruited on blog! Wow! And thanks. But been there, done that and our clients didn't like those 10 firms.
Posted by: Julie McGuire & Dan Hull at May 2, 2008 06:35 AM