Supreme Court Restricts the Taxation of Income of Companies Based Out of State

[flashl]

Source: NY Times

WASHINGTON — A unanimous Supreme Court decision on Tuesday limited the ability of states to tax the income that companies with out-of-state headquarters earn from their investments in businesses in their home state.

The ruling vacated a decision of the Appellate Court of Illinois in a case that drew the attention of two dozen states and many multistate corporations.

The Illinois court had upheld the state’s right to tax the $1 billion in capital gains earned by the Ohio-based MeadWestvaco Corporation, on the $1.5 billion sale in 1994 of an Illinois-based subsidiary, the Lexis/Nexis online research service.

MeadWestvaco, arguing that Illinois did not have the right to reach across state lines to tax the passive income from what amounted to an arm’s-length investment, paid the $4 million tax bill under protest and sued for a refund.

NY Times

Read more: http://www.nytimes.com/2008/04/16/business/16bizcourt.html?ref=washington

[Arctic Dave]

1. Interesting? Can you give this more context?

[flashl]

3. More from article ..

At the heart of the doctrine is what the court calls the “unitary business principle,” which requires before a state can impose its tax, a finding that the company’s in-state operations are part of a unified whole. The hallmarks of a unitary business, the court has held, are “functional integration, centralized management and economies of scale.”

The question for the court on Tuesday was whether an alternative route existed for states to capture revenue from businesses that were not unitary. The Supreme Court had raised this possibility with a passing reference in a 1992 opinion to tax liability generated by assets that served an “operational rather than an investment function” in a business. That ambiguous reference led some state courts to conclude that the justices had blessed an “operational function” test that paved the way to taxing multistate companies that did not qualify as unitary businesses.

That was an erroneous extrapolation, the high court said in an opinion by Justice Samuel A. Alito Jr. The earlier references to “operational function,” he said, “were not intended to modify the unitary business principle by adding a new ground” for taxation. Regardless of the details of a parent company’s relationship to its subsidiaries, the business had to be found unitary in the first place before a state could tax a part of the revenue.

[lynnertic]

2. BOHICA!

(Bend over here it comes again)