OCTOBER TERM, 1993
Syllabus
BARCLAYS BANK PLC
v. FRANCHISE TAX BOARD OF
CALIFORNIA
CERTIORARI TO THE COURT OF APPEAL OF CALIFORNIA, THIRD APPELLATE
DISTRICT
No. 92-1384. Argued March 28, 1994-Decided June 20,1994*
During the years at issue in these consolidated cases,
California used a "worldwide combined reporting" method to
determine the corporate franchise tax owed by unitary multinational
corporate group members doing business in California. California's
method first looked to the worldwide income of the unitary
business, and then taxed a percentage of that income equal to the
average of the proportions of worldwide payroll, property, and
sales located within California. In contrast, the Federal
Government employs a "separate accounting" method, which treats
each corporate entity discretely for the purpose of determining
income tax liability. In
Container Corp. of America v.
Franchise Tax Bd.,
463 U. S. 159, this Court
upheld the California scheme as applied to domestic-based
multinationals, but did not address the constitutionality of the
scheme as applied to domestic corporations with foreign parents or
to foreign corporations with foreign parents or foreign
subsidiaries. Both petitioner Barclays Bank PLC (Barc1ays)-a
foreign multinational-and petitioner Colgate-Palmolive Co.
(Colgate)-a domestic multinational-have operations in California.
In separate cases, two members of the Barc1ays group and Colgate
were denied refunds by the California authorities.
Held: The Constitution does not impede application of
California's tax to Barc1ays and Colgate. Pp. 310-331.
(a) Absent congressional approval, a state tax on interstate or
foreign commerce will not survive Commerce Clause scrutiny if the
taxpayer demonstrates that the tax (1) applies to an activity
lacking a substantial nexus to the taxing State; (2) is not fairly
apportioned; (3) discriminates against interstate commerce; or (4)
is not fairly related to the services the State provides.
Complete Auto Transit, Inc. v.
Brady, 430 U. S. 274,279. A tax
affecting
foreign commerce raises two additional concerns:
one prompted by the "enhanced risk of multiple taxation,"
Container Corp., 463 U. S., at 185, and the other related to
the Federal Government's capacity to "'speak with one voice when
regulating
*Together with No. 92-1839,
Colgate-Palmolive Co. v.
Franchise Tax Board of California, also on certiorari to the
same court.
299
commercial relations with foreign governments,'"
Japan Line,
Ltd. v.
County of Los Angeles, 441 U. S. 434, 449.
California's tax easily meets all but the third of the
Complete
Auto criteria. As to the third, Barclays has not shown that the
system in fact operates to impose inordinate compliance burdens on
foreign enterprises, and its claim of unconstitutional
discrimination against foreign commerce thus fails. Pp.
310-314.
(b) Nor has Barclays shown that California's "reasonable
approximations" method of reducing the compliance burden is
incompatible with due process. Barclays argues that California
employs no standard to determine what approximations will be
accepted, but Barclays has presented no example of an approximation
California rejected as unreasonable. Furthermore, the state
judiciary has construed California law to curtail the discretion of
state tax officials, and the State has afforded Barclays the
opportunity to seek clarification of the meaning of the relevant
regulations. Rules governing international multijurisdictional
income allocation have an inescapable imprecision given the subject
matter's complexity, and rules against vagueness are not
mechanically applied; rather, their application is tied to the
nature of the enactment. Pp. 314-316.
(c) California's system does not expose foreign multinationals,
such as Barclays, to constitutionally intolerable multiple
taxation. In the face of a similar challenge,
Container
Corp. approved this very tax when applied to a domestic-based
multinational. The considerations that informed the
Container
Corp. decision are not dispositively diminished when the tax is
applied to a foreign-based enterprise. Multiple taxation is not the
inevitable result of California's tax, and the alternative
reasonably available to the State-separate accounting-cannot
eliminate, and in some cases may even enhance, the risk of double
taxation. Pp. 316-320.
(d) California's scheme also does not prevent the Federal
Government from speaking with "one voice" in international trade.
Congress holds the control rein in this area. In the 11 years since
Container Corp., Congress has not barred States from using
the worldwide combined reporting method. In the past three decades,
aware that foreign governments deplored use of the method, Congress
nevertheless failed to enact any of numerous bills, or to ratify a
treaty provision, that would have prohibited the practice.
Executive Branch actions, statements, and
amicus filings do
not supply the requisite federal directive proscribing States' use
of worldwide combined reporting, for the regulatory authority is
Congress' to wield. Executive Branch communications that express
federal policy but lack the force of law cannot render
unconstitu-
300
300 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
Syllabus
tional California's otherwise valid, congressionally condoned
scheme. Pp.320-331.
No. 92-1384, 10 Cal. App. 4th 1742, 14 Cal. Rptr. 2d 537, and
No. 92-1839, 10 Cal. App. 4th 1768, 13 Cal. Rptr. 2d 761,
affirmed.
GINSBURG, J., delivered the opinion of the Court, in which
REHNQUIST, C. J., and BLACKMUN, STEVENS, KENNEDY, and SOUTER, JJ.,
joined, and in all but Part IV-B of which SCALIA, J., joined.
BLACKMUN, J., filed a concurring opinion,
post, p. 331.
SCALIA, J., filed an opinion concurring in part and concurring in
the judgment,
post, p. 331. O'CONNOR, J., filed an opinion
concurring in the judgment in part and dissenting in part, in which
THOMAS, J., joined,
post, p. 332.
Joanne M. Garvey argued the cause for petitioner in No. 92-1384.
With her on the briefs were Joan K. Irion, Miles N. Ruthberg, and
Teresa A. Maloney. James P. Kleier argued the cause for petitioner
in No. 92-1839. With him on the briefs were Walter Hellerstein,
Prentiss Willson, Jr., Clare M. Rathbone, and Franklin C.
Latcham.
Timothy G.
Laddish, Assistant Attorney General of
California, argued the cause for respondent in both cases. With him
on the brief for respondent in No. 92-1384 were
Daniel E.
Lungren, Attorney General of California,
Robert D.
Milam, Deputy Attorney General, and
Benjamin F. Miller.
Mr. Lungren,
Lawrence K. Keethe, Supervising Deputy Attorney
General of California,
John D. Schell, Deputy Attorney
General, and
Claudia K. Land filed a brief for respondent in
No. 92-1839.
Solicitor General Days argued the cause for the United States as
amicus curiae urging affirmance in both cases. With him on the
brief were Assistant Attorney General Argrett and Deputy Solicitor
General Wallace.t
tKendall L. Houghton and
William D. Peltz filed a
brief for the Committee on State Taxation as
amicus curiae
urging reversal in both cases.
Briefs of
amici curiae urging reversal in No. 92-1384
were filed for the Government of the United Kingdom by
Jerome B.
Libin and
William H. Morris; for the Member States of
the European Communities et al. by Messrs. Libin and Morris; for
Banque N ationale de Paris by
Roy E. Crawford and
Russell
D. Uzes; for the Confederation of British Industry by
Lee H.
Spence; for the Council of Netherlands Industrial Federations
by
301
JUSTICE GINSBURG delivered the opinion of the Court. Eleven
years ago, in
Container Corp. of America v.
Franchise Tax
Bd., 463 U. S.
159 (1983), this Court upheld California's income-based
corporate franchise tax, as applied to a
F.
Eugene Wirwahn; for the Federation of German
Industries et al. by Mr. Wirwahn; for Keidanren (Japan Federation
of Economic Organizations) by C.
David Swenson, Dennis I. Meyer,
Leonard B. Terr, and
Harry A. Franks, Jr.; for the Japan
Tax Association by
John A. Sturgeon; for the Organization
for International Investment Inc. et al. by
James Merle
Carter; for Reuters Ltd. by
Steven Alan Reiss and
Philip T. Kaplan; and for the Washington Legal Foundation by
Daniel J.
Popeo and
Richard A. Samp.
Briefs of
amici curiae urging reversal in No. 92-1839
were filed for the Chamber of Commerce of the United States by
Timothy B. Dyk, Beth Heifetz, Robin S.
Conrad, Mona
C.
Zeiberg, and
Jan S.
Amundson; and for the
National Foreign Trade Council, Inc., et al. by
Philip D.
Morrison and
Mary C.
Bennett.
Briefs of
amici curiae urging affirmance in both cases
were filed for the State of Alaska et al. by
Bruce M.
Botelho, Attorney General of Alaska, and
Lauri J.
Adams, Assistant Attorney General, and by the Attorneys
General for their respective States as follows:
Joseph P.
Mazurek of Montana,
Jeffrey R. Howard of New Hampshire,
and
Theodore R. Kulongoski of Oregon; for the State of New
Mexico et al. by
Tom Udall, Attorney General of New Mexico,
Daniel Yohalen, Assistant Attorney General, and
Bruce
J.
Fort and
Frank D. Katz, Special Assistant
Attorneys General, and by the Attorneys General for their
respective States as follows:
Winston Bryant of Arkansas,
Gale A. Norton of Colorado,
Larry EchoHawk of Idaho,
Michael E. Carpenter of Maine, and
Jeffrey B. Pine of
Rhode Island; for the State of North Dakota et al. by
M. K.
Heidi Heitkamp, Attorney General of North Dakota, and
Donnita A. Wald, Assistant Attorney General,
Robert A.
Marks, Attorney General of Hawaii, and
Kevin T.
Wakayama, Supervising Deputy Attorney General, and
Robert T.
Stephan, Attorney General of Kansas; for the California
Legislature by
Bion M. Gregory, James A. Marsala, Baldev S.
Heir, and
Michael R. Kelly; for the California Tax
Reform Association et al. by
Jack A. Blum and
Martin
Lobel; for Citizens for Tax Justice by
Jonathan P.
Hiatt; for the Council of State Governments et al. by
Richard Ruda and
Lee Fennell; for the Multistate Tax
Commission by
Alan H. Friedman and
Paull Mines; for
Senator Dorgan et al. by
Charles Rothwell Nesson; and for
Congressman Edwards et al. by
Martin Lobel, Jack A. Blum,
and
Dina R. Lassow.
Eric J.
Miethke, John E. Mueller, and
Sheridan
M. Cranmer filed a brief for Litton Industries, Inc., et al. as
amici curiae urging affirmance in No. 92-1839.
302
302 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
multinational enterprise, against a comprehensive challenge made
under the Due Process and Commerce Clauses of the Federal
Constitution.
Container Corp. involved a corporate taxpayer
domiciled and headquartered in the United States; in addition to
its stateside components, the taxpayer had a number of overseas
subsidiaries incorporated in the countries in which they operated.
The Court's decision in
Container Corp. did not address the
constitutionality of California's taxing scheme as applied to
"domestic corporations with foreign parents or [to] foreign
corporations with either foreign parents or foreign subsidiaries."
Id., at 189, n. 26. In the consolidated cases before us, we
return to the taxing scheme earlier considered in
Container
Corp. and resolve matters left open in that case.
The petitioner in No. 92-1384, Barclays Bank PLC (Barclays), is
a United Kingdom corporation in the Barclays Group, a multinational
banking enterprise. The petitioner in No. 92-1839,
Colgate-Palmolive Co. (Colgate), is the United States-based parent
of a multinational manufacturing and sales enterprise. Each
enterprise has operations in California. During the years here at
issue, California determined the state corporate franchise tax due
for these operations under a method known as "worldwide combined
reporting." California's scheme first looked to the worldwide
income of the multinational enterprise, and then attributed a
portion of that income (equal to the average of the proportions of
worldwide payroll, property, and sales located in California) to
the California operations. The State imposed its tax on the income
thus attributed to Barclays' and Colgate's California business.
Barclays urges that California's tax system distinctively
burdens foreign-based multinationals and results in double
international taxation, in violation of the Commerce and Due
Process Clauses. Both Barclays and Colgate contend that the scheme
offends the Commerce Clause by frustrating the Federal Government's
ability to "speak with one voice when
303
regulating commercial relations with foreign governments."
Japan Line, Ltd. v.
County of Los Angeles, 441 U. S. 434, 449 (1979)
(internal quotation marks omitted). We reject these arguments, and
hold that the Constitution does not impede application of
California's corporate franchise tax to Barclays and Colgate.
Accordingly, we affirm the judgments of the California Court of
Appeal.
I A
The Due Process and Commerce Clauses of the Constitution, this
Court has held, prevent States that impose an income-based tax on
nonresidents from "tax [ing] value earned outside [the taxing
State's] borders."
ASARCO Inc. v.
Idaho Tax Comm'n,
458 U. S. 307,
315 (1982). But when a business enterprise operates in more than
one taxing jurisdiction, arriving at "precise territorial
allocations of 'value' is often an elusive goal, both in theory and
in practice."
Container Corp., 463 U. S., at 164. Every
method of allocation devised involves some degree of arbitrariness.
See id., at 182.
One means of deriving locally taxable income, generally used by
States that collect corporate income-based taxes, is the "unitary
business" method. As explained in
Container Corp., unitary
taxation "rejects geographical or transactional accounting," which
is "subject to manipulation" and does not fully capture "the many
subtle and largely unquantifiable transfers of value that take
place among the components of a single enterprise."
Id., at
164-165. The "unitary business/formula apportionment" method
"calculates the local tax base by first defining the scope of
the 'unitary business' of which the taxed enterprise's activities
in the taxing jurisdiction form one part, and then apportioning the
total income of that 'unitary business' between the taxing
jurisdiction and the rest of the world on the basis of a formula
taking into account ob-
304
304 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
jective measures of the corporation's activities within and
without the jurisdiction." Id., at 165.1
During the income years at issue in these cases-1977 for
Barclays, 1970-1973 for Colgate-California assessed its corporate
franchise tax by employing a "worldwide combined reporting" method.
California's scheme required the taxpayer to aggregate the income
of all corporate entities composing the unitary business
enterprise, including in the aggregation both affiliates operating
abroad and those operating within the United States. Having defined
the scope of the "unitary business" thus broadly, California used a
long-accepted method of apportionment, commonly called the
"three-factor" formula, to arrive at the amount of income
attributable to the operations of the enterprise in California.
Under the three-factor formula, California taxed a percentage of
worldwide income equal to the arithmetic average of the proportions
of worldwide payroll, property, and sales located inside the State.
Cal. Rev. & Tax. Code Ann. § 25128
1 This Court first considered the "unitary business principle"
in 1897,
Adams Express Co. v.
Ohio State Auditor,
165 U. S. 194,
220-221; we revisited this "settled jurisprudence" most recently in
Allied-Signal, Inc. v.
Director, Div. of Taxation,
504 U. S. 768,
779-788 (1992). See generally 1 J. Hellerstein & W.
Hellerstein, State Taxation: Corporate Income and Franchise Taxes ,
8.03, p. 8-29 (2d ed. 1993); id., , 8.05. On the determination
whether a business is "unitary," see
Allied-Signal, 504 U.
S., at 781-782 (business may be treated as unitary, compatibly with
constitutional limitations, if it exhibits functional integration,
centralization of management, and economies of scale);
Edison
California Stores, Inc. v.
McColgan, 30 Cal. 2d 472,
481, 183 P. 2d 16, 21 (1947) ("If the operation of the portion of
the business done within the state is dependent upon or contributes
to the operation of the business without the state, the operations
are unitary.");
Butler Brothers v.
McColgan, 17 Cal.
2d 664, 678, 111 P. 2d 334, 341 (1941) (A business is unitary if
there is "(1) [u]nity of ownership; (2) [u]nity of operation as
evidenced by central purchasing, advertising, accounting and
management divisions; and (3) unity of use of its centralized
executive force and general system of operation."), aff'd,
315 U. S. 501 (1942).
305
(West 1992). Thus, if a unitary business had 8% of its payroll,
3% of its property, and 4% of its sales in California, the State
took the average-5%-and imposed its tax on that percentage of the
business' total income.2
B
The corporate income tax imposed by the United States employs a
"separate accounting" method, a means of apportioning income among
taxing sovereigns used by all major developed nations. In contrast
to combined reporting, separate accounting treats each corporate
entity discretely for the purpose of determining income tax
liability.3
Separate accounting poses the risk that a conglomerate will
manipulate transfers of value among its components to minimize its
total tax liability. To guard against such manipulation,
transactions between affiliated corporations must be scrutinized to
ensure that they are reported on an "arm'slength" basis, i.
e., at a price reflecting their true market value. See 26 U.
S. C. §482; Treas. Reg. § 1.482-1T(b), 26 CFR § 1.482-1 T(b)
(1993).4 Assuming that all transactions are assigned their
arm's-length values in the corporate accounts, a jurisdiction using
separate accounting taxes corporations that operate within its
borders only on the income
2 In 1993, California modified the formula to double the weight
of the sales factor. Cal. Rev. & Tax. Code Ann. § 25128 (West
Supp. 1994); 1993 Cal. Stats., ch. 946, § 1.
3 An affiliated group of domestic corporations may, however,
elect to file a consolidated federal tax return in lieu of separate
returns. 26 U. S. C. § 1501.
4 Effective enforcement of arm's-length standards requires
exacting scrutiny by the taxing jurisdiction, and some commentators
maintain that the results are arbitrary in any event. See 1
Hellerstein & Hellerstein, supra, , 8.03 (describing "three
inherent defects" of separate accounting: compliance expense,
impracticability, and the difficulty of arriving at "arm's-length"
prices).
306
306 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
those corporations recognize on their own books. See
Container Corp., 463 U. S., at 185.5
At one time, a number of States used worldwide combined
reporting, as California did during the years at issue. In recent
years, such States, including California, have modified their
systems at least to allow corporate election of some variant of an
approach that confines combined reporting to the United States'
"water's edge." See 1 Hellerstein & Hellerstein,
supra
n. 1, , 8.16, at 8-185 to 8-187. California's 1986 modification of
its corporate franchise tax, effective in 1988, 1986 Cal. Stats.,
ch. 660, § 6, made it nearly the last State to give way. 1
Hellerstein & Hellerstein,
supra n. 1, , 8.16, at
8-187.
California corporate taxpayers, under the State's water's edge
alternative, may elect to limit their combined reporting group to
corporations in the unitary business whose individual presence in
the United States surpasses a certain threshold. Cal. Rev. &
Tax. Code Ann. § 25110 (West 1992); see Leegstra, Eager, &
Stolte, The California Water's-Edge Election, 6 J. St. Tax'n 195
(1987) (explaining operation of California's water's edge system).
The 1986 amendment conditioned a corporate group's water's edge
election on payment of a substantial fee, and allowed the
California Franchise Tax Board (Tax Board) to disregard a water's
edge election under certain circumstances. In 1993, California
again modified its corporate franchise tax statute, this time to
allow domestic and foreign enterprises to elect water's edge
treatment without payment of a fee and without the threat of
disregard. 1993 Cal. Stats., ch. 31, § 53; id., ch. 881,
5 Under the Internal Revenue Code, a foreign corporation reports
only income derived from a United States source or otherwise
effectively connected with the corporation's conduct of a United
States trade or business. 26 U. S. C. §§ 881, 882, 884, 864(c).
Domestic corporations must report all income, whether the source is
domestic or foreign, § 11, though they receive a tax credit for
qualifying taxes paid to foreign sovereigns, 26 U. S. C. §§ 901-908
(1988 ed. and Supp. IV).
307
§ 22. See Cal. Rev. & Tax. Code Ann. § 25110 (West Supp.
1994). The new amendments became effective in January 1994.
C
The first of these consolidated cases, No. 92-1384, is a tax
refund suit brought by two members of the Barclays Group, a
multinational banking enterprise. Based in the United Kingdom, the
Barclays Group includes more than 220 corporations doing business
in some 60 nations. The two refundseeking members of the Barclays
corporate family did business in California and were therefore
subject to California's franchise tax. Barclays Bank of California
(Barcal), one of the two taxpayers, was a California banking
corporation wholly owned by Barclays Bank International Limited
(BB!), the second taxpayer. BBI, a United Kingdom corporation, did
business in the United Kingdom and in more than 33 other nations
and territories.
In computing its California franchise tax based on 1977 income,
Barcal reported only the income from its own operations. BBI
reported income on the assumption that it participated in a unitary
business composed of itself and its subsidiaries, but not its
parent corporation and the parent's other subsidiaries. After
auditing BBl's and Barcal's 1977 income year franchise tax returns,
the Tax Board, respondent here, determined that both were part of a
worldwide unitary business, the Barclays Group. Ultimately, the Tax
Board assessed additional tax liability of $1,678 for BBI and
$152,420 for Barcal. 6
6 The figures used by the Tax Board were:
Taxpayer |
Worldwide
Taxable
Income
|
California
Formula
Percentage |
Business
Income
|
Franchise
Tax |
|
| Barcal |
$401,566,973 |
.0139032% |
$5,583,066 |
$693,696 |
| BBI |
401,566,973 |
.0003232% |
129,786 |
16,126 |
App. in No. 92-1384, pp. A-13 to A-14 (Joint Stipulation of
Facts' 22).
308
308 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
Barcal and BBI paid the assessments and sued for refunds.
They prevailed in California's lower courts, but were
unsuccessful in California's Supreme Court. The California Supreme
Court held that the tax did not impair the Federal Government's
ability to "speak with one voice" in regulating foreign commerce,
see
Japan Line, Ltd. v.
County of Los Angeles, 441 U.
S., at 449, and therefore did not violate the Commerce Clause.
Having so concluded, the California Supreme Court remanded the case
to the Court of Appeal for further development of Barclays' claim
that the compliance burden on foreign-based multinationals imposed
by California's tax violated both the Due Process Clause and the
nondiscrimination requirement of the Commerce Clause.
Barclay's
Bank Int'l, Ltd. v.
Franchise Tax Bd., 2 Cal. 4th 708,
829 P. 2d 279, cert. denied, 506 U. S. 870 (1992). On remand, the
Court of Appeal decided the compliance burden issues against
Barclays, 10 Cal. App. 4th 1742, 14 Cal. Rptr. 2d 537 (3d Dist.
1992), and the California Supreme Court denied further review. The
case is therefore before us on writ of certiorari to the California
Court of Appeal. 510 U. S. 942 (1993). Barclays has conceded, for
purposes of this litigation, that the entire Barclays Group formed
a worldwide unitary business in 1977.7
The petitioner in No. 92-1839, Colgate-Palmolive Co., is a
Delaware corporation headquartered in New York. Colgate and its
subsidiaries doing business in the United States engaged
principally in the manufacture and distribution of household and
personal hygiene products. In addition, Colgate owned some 75
corporations that operated entirely outside the United States;
these foreign subsidiaries also engaged primarily in the
manufacture and distribution of household and personal hygiene
products. When Colgate
7The petitioner in No. 92-1384, Barclays Bank PLC, is the
successor in interest to the tax refund claims of both Barcal and
BBL For convenience, this opinion uses "Barclays" to refer
collectively to the taxpayers and the petitioner in No.
92-1384.
309
filed California franchise tax returns based on 1970-1973
income, it reported the income earned from its foreign operations
on a separate accounting basis. Essentially, Colgate maintained
that the Constitution compelled California to limit the reach of
its unitary principle to the United States' water's edge. See
supra, at 306. The Tax Board determined that Colgate's taxes
should be computed on the basis of worldwide combined reporting,
and assessed a 4-year deficiency of $604,765.8 Colgate paid the tax
and sued for a refund.
Colgate prevailed in the California Superior Court, which found
that the Federal Government had condemned worldwide combined
reporting as impermissibly intrusive upon the Nation's ability
uniformly to regulate foreign commercial relations. No. 319715
(Super. Ct. Sacramento Cty., Apr. 19, 1989) (reprinted in App. to
Pet. for Cert. in No. 92-1839, pp. 88a-102a). The Court of Appeal
reversed, concluding
8 Colgate offered the following figures, using a water's edge
approach:
Income
Year |
Water's edge
Taxable
Income
|
Formula
Percentage |
California
Business
Income
|
Franchise
Tax |
|
| 1970 |
$25,652,055 |
9.31920% |
$2,390,566 |
$167,340 |
| 1971 |
27,520,141 |
9.01730% |
2,481,574 |
173,710 |
| 1972 |
32,440,358 |
9.21640% |
2,989,833 |
227,227 |
| 1973 |
36,554,060 |
8.88730% |
3,248,669 |
269,640 |
No. 319715 (Super. Ct. Sacramento Cty., Apr. 19, 1989)
(reprinted in App. to Pet. for Cert. in No. 92-1839, p. 85a).
Under California's worldwide combined reporting method, the
computations were:
Income
Year |
Water's edge
Taxable
Income
|
Formula
Percentage |
California
Business
Income
|
Franchise
Tax |
|
| 1970 |
$ 91,566,729 |
4.42075% |
$4,047,936 |
$283,356 |
| 1971 |
108,177,612 |
4.12017% |
4,457,101 |
311,997 |
| 1972 |
123,779,352 |
4.03444% |
4,993,803 |
379,529 |
| 1973 |
151,585,860 |
3.71812% |
5,636,144 |
467,800 |
Id., at 84a
310
310 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
that evidence of the Federal Executive's opposition to the tax
was insufficient. 4 Cal. App. 4th 1681, 1700-1712, 284 Cal. Rptr.
780, 792-800 (3d Dist. 1991). The California Supreme Court returned
the case to the Court of Appeal with instructions "to vacate its
decision and to refile the opinion after modification in light of"
that Court's decision in
Barclays. 9 Cal. Rptr. 2d 358, 831
P. 2d 798 (1992). In its second decision, the Court of Appeal again
ruled against Colgate. 10 Cal. App. 4th 1768, 13 Cal. Rptr. 2d 761
(3d Dist. 1992). The California Supreme Court denied further
review, and the case is before us on writ of certiorari to the
Court of Appeal. 510 U. S. 942 (1993). Like Barclays, Colgate
concedes, for purposes of this litigation, that during the years in
question, its business, worldwide, was unitary.
II
The Commerce Clause expressly gives Congress power "[t]o
regulate Commerce with foreign Nations, and among the several
States." U. S. Const., Art. I, § 8, cl. 3. It has long been
understood, as well, to provide "protection from state legislation
inimical to the national commerce [even] where Congress has not
acted .... "
Southern Pacific Co. v.
Arizona ex rel.
Sullivan, 325 U.
S. 761, 769 (1945); see also
South Carolina Highway
Dept. v.
Barnwell Brothers, Inc., 303 U. S. 177, 185 (1938)
(Commerce Clause "by its own force prohibits discrimination against
interstate commerce").9 The Clause does not shield interstate (or
foreign) commerce from its "fair share of the state tax burden."
Department of Revenue of Wash. v.
Association of Wash.
Stevedoring Cos., 435 U. S. 734, 750
(1978). Absent congressional approval, however, a state tax on such
commerce will not survive Commerce Clause scrutiny if the taxpayer
demonstrates that the tax (1) applies to an activity lacking a
substantial nexus to the taxing State; (2) is not fairly appor-
9 Our jurisprudence refers to the self-executing aspect of the
Commerce Clause as the "dormant" or "negative" Commerce Clause.
311
tioned; (3) discriminates against interstate commerce;
or
(4) is not fairly related to the services provided by the State.
Complete Auto Transit, Inc. v.
Brady, 430 U. S. 274, 279
(1977).
In "the unique context of foreign commerce," a State's power is
further constrained because of "the special need for federal
uniformity."
Wardair Canada Inc. v.
Florida Dept. of
Revenue, 477 U. S.
1, 8 (1986). "'In international relations and with respect to
foreign intercourse and trade the people of the United States act
through a single government with unified and adequate national
power.'''
Japan Line, Ltd. v.
County of Los Angeles,
441 U. S., at 448, quoting
Board of Trustees of Univ. of
Ill. v.
United States, 289 U. S. 48, 59 (1933). A
tax affecting
foreign commerce therefore raises two concerns
in addition to the four delineated in
Complete Auto. The
first is prompted by "the enhanced risk of multiple taxation."
Container Corp., 463 U. S., at 185. The second relates to
the Federal Government's capacity to "'speak with one voice when
regulating commercial relations with foreign governments.'''
Japan Line, 441 U. S., at 449, quoting
Michelin Tire
Corp. v.
Wages, 423 U. S. 276, 285
(1976).
California's worldwide combined reporting system easily meets
three of the four
Complete Auto criteria. The nexus
requirement is met by the business all three taxpayersBarcal, BBI,
and Colgate-did in California during the years in question. See
Mobil Oil Corp. v.
Commissioner of Taxes of Vt.,
445 U. S. 425,
436-437 (1980).10 The "fair apportion-
10 Amicus curiae the Government of the United Kingdom
points to
Quill Corp. v.
North Dakota, 504 U. S. 298 (1992),
which held that the Commerce Clause demands more of a connection
than the "minimum contacts" that suffice to satisfy the due process
nexus requirement for assertion of judicial jurisdiction. Brief for
Government of United Kingdom as
Amicus Curiae in No.
92-1384, pp. 24-25. Noting the absence of "any meaningful contact"
between California and the activities of Barclays Group members
operating exclusively
outside the United States,
id.,
at 25, the United Kingdom asserts that the trial court erred if it
concluded
312
312 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
ment" standard is also satisfied. Neither Barclays nor Colgate
has demonstrated the lack of a "rational relationship between the
income attributed to the State and the intrastate values of the
enterprise,"
Container Corp., 463 U. S., at 180-181
(internal quotation marks omitted); nor have the petitioners shown
that the income attributed to California is "out of all appropriate
proportion to the business transacted by the [taxpayers] in that
State."
Id., at 181 (internal quotation marks omitted). We
note in this regard that, "if applied by every jurisdiction,"
California's method "would result in no more than all of the
unitary business' income being taxed."
Id., at 169. And
surely California has afforded Colgate and the Barclays taxpayers
"protection, opportunities and benefits" for which the State can
exact a return.
Wisconsin v. J. C.
Penney Co.,
311 U. S. 435,
444 (1940); see
ASARCO Inc. v.
Idaho State Tax
Comm'n, 458 U. S., at 315.
Barclays (but not Colgate) vigorously contends, however, that
California's worldwide combined reporting scheme violates the
antidiscrimination component of the
Complete Auto
that "California had the requisite nexus with
every
member of the Barclays group," id., at 27 (emphasis added).
The trial court, however, did not reach the conclusion the
United Kingdom suggests it did, nor was there cause for it so to
do. As the United Kingdom recognizes, the theory underlying unitary
taxation is that "certain intangible 'flows of value' within the
unitary group serve to link the various members together as if they
were essentially a single entity."
Id., at 26. Formulary
apportionment of the income of a multijurisdictional (but unitary)
business enterprise, if fairly done, taxes only the "income
generated within a State."
Allied-Signal, Inc. v.
Director, Div. of Taxation, 504 U. S., at 783 (upholding
"unitary business principle" as "an appropriate means for
distinguishing between income generated within a State and income
generated without").
Quill held that the Commerce Clause
requires a
taxpayer's "physical presence" in the taxing
jurisdiction before that jurisdiction can constitutionally impose a
use tax. 504 U. S., at 317. The California presence of the
taxpayers before us is undisputed, and we find nothing in
Quill to suggest that California may not reference the
income of corporations worldwide with whom those taxpayers are
closely intertwined in order to approximate the taxpayers'
California income.
313
test. Barclays maintains that a foreign owner of a taxpayer
filing a California tax return "is forced to convert its diverse
financial and accounting records from around the world into the
language, currency, and accounting principles of the United States"
at "prohibitiv[e]" expense. Brief for Petitioner in No. 92-1384, p.
44.11 Domestic-owned taxpayers, by contrast, need not incur such
expense because they "already keep most of their records in
English, in United States currency, and in accord with United
States accounting principles."
Id., at 45. Barclays urges
that imposing this "prohibitive administrative burden," id., at 43,
on foreign-owned enterprises gives a competitive advantage to their
United States-owned counterparts and constitutes "economic
protectionism" of the kind this Court has often condemned.
Id., at 43-46.
Compliance burdens, if disproportionately imposed on
out-of-jurisdiction enterprises, may indeed be inconsonant with the
Commerce Clause. See,
e. g., Hunt v.
Washington State
Apple Advertising Comm'n, 432 U. S. 333, 350-351
(1977) (increased costs imposed by North Carolina statute on
out-of-state apple producers "would tend to shield the local apple
industry from the competition of Washington apple growers," thereby
discriminating against those growers). The factual predicate of
Barclays' discrimination claim, however, is infirm.
Barclays points to provisions of California's implementing
regulations setting out three discrete means for a taxpayer to
fulfill its franchise tax reporting requirements. Each of these
modes of compliance would require Barclays to gather and present
much information not maintained by the unitary
11 Barclays estimates, and the trial court found, that an
accounting system capable of conveying the information Barclays
thought California's worldwide reporting scheme required for all of
the enterprise's foreign affiliates would cost more than $5 million
to set up, and more than $2 million annually to maintain. Brief for
Petitioner in No. 92-1384, p. 44, n. 13; Nos. 325059 and 325061
(Super. Ct. Sacramento Cty., Aug. 20, 1987) (reprinted in App. to
Pet. for Cert. in No. 92-1384, pp. A-27 to A-28).
314
314 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
group in the ordinary course of business.12 California's
regulations, however, also provide that the Tax Board "shall
consider the effort and expense required to obtain the necessary
information" and, in "appropriate cases, such as when the necessary
data cannot be developed from financial records maintained in the
regular course of business," may accept "reasonable
approximations." Cal. Code of Regs., Title 18, § 25137-6(e)(1)
(1985). As the Court of Appeal comprehended, in determining
Barclays' 1977 worldwide income, Barclays and the Tax Board "used
these [latter] provisions and [made] computations based on
reasonable approximations," 10 Cal. App. 4th, at 1756, 14 Cal.
Rptr. 2d, at 545, thus allowing Barclays to avoid the large
compliance costs of which it complains.13 Barclays has not shown
that California's provision for "reasonable approximations"
systematically "overtaxes" foreign corporations generally or BBI or
Barcal in particular.
In sum, Barclays has not demonstrated that California's tax
system in fact operates to impose inordinate compliance burdens on
foreign enterprises. Barclays' claim of unconstitutional
discrimination against foreign commerce therefore fails.
III
Barclays additionally argues that California's "reasonable
approximations" method of reducing the compliance burden
12 Under the regulations to which Barc1ays refers, a "unitary
business with operations in foreign countries" may determine its
worldwide income based upon either (1) "[a] profit and loss
statement ... for each foreign branch or corporation," Cal. Code of
Regs., Title 18, § 25137-6(b)(1) (1985); (2) the "consolidated
profit and loss statement prepared for the related corporations of
which the unitary business is a member which is prepared for filing
with the Securities and Exchange Commission," § 25137-6(b)(2); or
(3) "the consolidated profit and loss statement prepared for
reporting to shareholders and subject to review by an independent
auditor," ibid.
13 The California Court of Appeal additionally found that
Barc1ays' actual compliance costs were "relatively modest" during
the years just prior to those here at issue, ranging from $900 to
$1,250 per annum, for BBl. See 10 Cal. App. 4th, at 1760, n. 9, 14
Cal. Rptr. 2d, at 548, n. 9.
315
is incompatible with due process. "Foreign multinationals,"
Barclays maintains, "remain at peril in filing their tax returns
because there is no standard to determine what 'approximations'
will be accepted." Brief for Petitioner in No. 92-1384, at 49.
Barclays presents no substantive grievance concerning the treatment
it has received, i.
e., no example of an approximation
rejected by the Tax Board as unreasonable. Barclays instead
complains that "[t]he grant of standardless discretion itself
violates due process," so that the taxpayer need not show "actual
harm from arbitrary application."
Ibid.
We note, initially, that "reasonableness" is a guide admitting
effective judicial review in myriad settings, from encounters
between the police and the citizenry, see
Terry v. Ohio,
392 U. S. 1, 27
(1968) (Fourth Amendment permits police officer's limited search
for weapons in circumstances where "reasonably prudent man ...
would be warranted in the belief that his safety or that of others
was in danger" based upon "reasonable inferences ... draw[n] from
the facts in light of [officer's] experience"), to the more closely
analogous federal income tax context. See,
e. g., 26 U. S.
C. § 162(a)(1) (allowing deductions for ordinary business expenses,
including a "reasonable allowance for salaries or other
compensation"); § 167(a) (permitting a "reasonable allowance" for
wear and tear as a depreciation deduction); see also
United
States v.
Ragen, 314 U. S. 513, 522 (1942)
(noting that determinations "by reference to a standard of
'reasonableness' [are] not unusual under federal income tax
laws").
We next observe that California's judiciary has construed the
California law to curtail the discretion of California tax
officials. See 10 Cal. App. 4th, at 1762, 14 Cal. Rptr. 2d, at 549
(the Tax Board must consider "regularly-maintained or other
readily-accessibly corporate documents" in deciding whether the
"cost and effort of producing [worldwide combined reporting]
information" justifies submission of "reasonable approximations").
We note, furthermore, that California has afforded Barclays the
opportunity "to clarify the
316
316 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
meaning of the regulation[s] by its own inquiry, or by resort to
an administrative process." See
Hoffman Estates v.
Flipside, Hoffman Estates, Inc., 455 U. S. 489, 498
(1982). Taxpayers, under the State's scheme, may seek "an advance
determination" from the Tax Board regarding the tax consequences of
a proposed course of action. Cal. Code of Regs., Title 18, §
25137-6(e)(2) (1985).
Rules governing international multijurisdictional income
allocation have an inescapable imprecision given the complexity of
the subject matter. See
Container Corp., 463 U. S., at 192
(allocation "bears some resemblance ... to slicing a shadow").14
Mindful that rules against vagueness are not "mechanically applied"
but depend, in their application, on "the nature of the enactment,"
Hoffman Estates, 455 U. S., at 498, we hold that
California's scheme does not transgress constitutional limitations
in this regard, and that Barclays' due process argument is no more
weighty than its claim of discrimination first placed under a
Commerce Clause heading.
IV A
Satisfied that California's corporate franchise tax is "proper
and fair" as tested under
Complete Auto's guides,
14 As noted by the California Court of Appeal, even the federal
separate accounting scheme preferred by Barc1ays entails recourse
to a standard "akin to reasonable approximation." 10 Cal. App. 4th
1742, 1763, 14 Cal. Rptr. 2d 537, 550 (1993). The Internal Revenue
Code allows the Secretary of Treasury to "distribute, apportion, or
allocate gross income, deductions, credits, or allowances" among a
controlled group of businesses "if he determines that such
distribution, apportionment, or allocation is necessary in order to
prevent evasion of taxes or clearly to reflect the income" of such
businesses. 26 U. S. C. §482; see App. in No. 92-1384, p. A-829
(testimony of Barc1ays' expert witness that § 482 requires
"reasonable approximation[s]" of arm's-length prices);
Peck
v.
Commissioner, 752 F.2d
469,472 (CA9 1985) (under §482, Internal Revenue Service
determination of arm's-length prices will be sustained unless
unreasonable, arbitrary, or capricious).
317
see
Container Corp., 463 U. S., at 184, we proceed to the
"additional scrutiny" required when a State seeks to tax
foreign commerce.
Id., at 185. First of the two
additional considerations is "the enhanced risk of multiple
taxation."
Ibid.
In
Container Corp., we upheld application of California's
combined reporting obligation to "foreign subsidiaries of
domestic corporations,"
id., at 193 (emphasis added),
against a charge that such application unconstitutionally exposed
those subsidiaries to a risk of multiple international taxation.15
Barclays contends that its situation compels a different outcome,
because application of the combined reporting obligation to foreign
multinationals creates a "'more aggravated' risk ... of double
taxation." Brief for Petitioner in No. 92-1384, at 32, quoting Nos.
325059 and 325061 (Super. Ct. Sacramento Cty., Aug. 20, 1987)
(reprinted in App. to Pet. for Cert. in No. 92-1384, p. A-26).
Barclays rests its argument on the observation that "foreign
multinationals typically have more of their operations and entities
outside of the United States [compared to] domestic multinationals,
which typically have a smaller share of their operations and
entities outside of the United States." Brief for Petitioner in No.
92-1384, at 33.16 As a result, a higher proportion of the income of
a foreign multinational is subject to taxation by foreign
sovereigns. This reality, Barclays concludes, means that for the
foreign multinational, which must include all its foreign
operations in the California combined reporting group, "the breadth
of double taxation and the degree of burden on foreign commerce are
greater than in the case of domestic multinationals."
Ibid.
15We reserved judgment on whether an altered analysis would be
required where the taxpayer was part of a foreign-based enterprise.
See
Container Corp., 463 U. S., at 189, n. 26;
id.,
at 195, n. 32.
16 To illustrate, Barclays points to its own operations: only 3
of the more than 220 entities in the Barc1ays Group did any
business in the United States. Brief for Petitioner in No. 92-1384,
at 33.
318
318 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
We do not question Barclays' assertion that multinational
enterprises with a high proportion of income taxed by jurisdictions
with wage rates, property values, and sales prices lower than
California's face a correspondingly high risk of multiple
international taxation. See
Container Corp., 463 U. S., at
187; cf. id., at 199-200 (Powell, J., dissenting) (describing how
formulary apportionment leads to multiple taxation). Nor do we
question that foreign-based multinationals have a higher proportion
of such income, on average, than do their United States
counterparts. But
Container Corp.'s approval of this very
tax, in the face of a multiple taxation challenge, did not rest on
any insufficiency in the evidence that multiple taxation might
occur; indeed, we accepted in that case the taxpayer's assertion
that multiple taxation in fact had occurred.
Id., at 187
("[T]he tax imposed here, like the tax in
Japan Line, has
resulted in actual double taxation, in the sense that some of the
income taxed without apportionment by foreign nations as
attributable to appellant's foreign subsidiaries was also taxed by
California as attributable to the State's share of the total income
of the unitary business of which those subsidiaries are a part.");
see also id., at 187, n. 22.
Container Corp.'s holding on multiple taxation relied on
two considerations: first, that multiple taxation was not the
"inevitable result" of the California tax; 17 and, second, that the
"alternativ[e] reasonably available to the taxing State" (i.
e., some version of the separate accounting/"arm's
length"
17The Court stated: "[T]he double taxation in this case,
although real, is not the 'inevitabl[e]' result of the California
taxing scheme .... [W]e are faced with two distinct methods of
allocating the income of a multinational enterprise. The
'arm's-length' approach divides the pie on the basis of formal
accounting principles. The formula apportionment method divides the
same pie on the basis of a mathematical generalization. Whether the
combination 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 case."
Container
Corp., 463 U. S., at 188 (citation omitted).
319
approach), id., at 188-189, "could not eliminate the risk of
double taxation" and might in some cases enhance that risk.
Id., at 191.18 We underscored that "even though most nations
have adopted the arm's-length approach in its general outlines, the
precise rules under which they reallocate income among affiliated
corporations often differ substantially, and
whenever that
difference exists, the possibility of double taxation also exists."
Ibid. (emphasis added); see also
id., at 192
("California would have trouble avoiding multiple taxation even if
it adopted the 'arm's-length' approach .... ").
These considerations are not dispositively diminished when
California's tax is applied to the components of foreign, as
opposed to domestic, multinationals. Multiple taxation of such
entities because of California's scheme is not "inevitable"; the
existence
vel non of actual multiple taxation of income
remains, as in
Container Corp., dependent "on the facts of
the individual case."
Id., at 188. And if, as we have held,
adoption of a separate accounting system does not dispositively
lessen the risk of multiple taxation of the income earned by
foreign affiliates of
domestic-owned corporations, we see no
reason why it would do so in respect of the income earned by
foreign affiliates of
foreign-owned corporations. We refused
in
Container Corp. "to require California to give up one
allocation method that sometimes results in double taxation in
favor of another allocation method that also sometimes results in
double taxation."
Id., at 193. The
18The Court's decision in
Container Corp. effectively
modified, for purposes of
income taxation, the Commerce
Clause multiple taxation inquiry described in
Japan Line,
Ltd. v.
County of Los Angeles, 441 U. S. 434 (1979)
(holding unconstitutional application of California's ad valorem
property tax to cargo containers based in Japan and used
exclusively in foreign commerce). In
Japan Line, confronting
a property tax on containers used as "instrumentalities of
[foreign] commerce," not an income tax on companies, we said that a
state tax is incompatible with the Commerce Clause if it "creates a
substantial risk of international multiple taxation."
Id.,
at 451.
320
320 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
foreign domicile of the taxpayer (or the taxpayer's parent) is a
factor inadequate to warrant retraction of that position.
Recognizing that multiple taxation of international enterprise
may occur whatever taxing scheme the State adopts, JUSTICE
O'CONNOR, dissenting in No. 92-1384, finds impermissible under "the
[dormant] Foreign Commerce Clause" only double taxation that (1)
burdens a foreign corporation in need of protection for lack of
access to the political process, and (2) occurs "because [the
State] does not conform to international practice."
Post, at
336. But the image of a politically impotent foreign transactor is
surely belied by the battalion of foreign governments that has
marched to Barclays' aid, deploring worldwide combined reporting in
diplomatic notes,
amicus briefs, and even retaliatory
legislation. See
infra, at 324, n. 22;
post, at 337.
Indeed, California responded to this impressive political activity
when it eliminated mandatory worldwide combined reporting. See
supra, at 306. In view of this activity, and the control
rein Congress holds, see
infra, at 329-331, we cannot agree
that "international practice" has such force as to dictate this
Court's Commerce Clause jurisprudence. We therefore adhere to the
precedent set in
Container Corp.
B
We turn, finally, to the question ultimately and most
energetically presented: Did California's worldwide combined
reporting requirement, as applied to Barcal, BBI, and Colgate,
"impair federal uniformity in an area where federal uniformity is
essential,"
Japan Line, 441 U. S., at 448; in particular,
did the State's taxing scheme "preven[t] the Federal Government
from 'speaking with one voice' in international trade"?
Id.,
at 453, quoting
Michelin Tire Corp. v.
Wages, 423 U.
S., at 285.
1
Two decisions principally inform our judgment: first, this
Court's 1983 determination in
Container Corp.; and second,
our decision three years later in
Wardair Canada Inc. v.
321
Florida Dept. of Revenue, 477 U. S. 1 (1986).
Container Corp. held that California's worldwide combined
reporting requirement, as applied to domestic corporations with
foreign subsidiaries, did not violate the "one voice" standard.
Container Corp. bears on Colgate's case, but not Barcal's or
BBl's, to this extent: "[T]he tax [in
Container Corp.] was
imposed, not on a foreign entity ... , but on a domestic
corporation." 463 U. S., at 195.19 Other factors emphasized in
Container Corp., however, are relevant to the complaints of
all three taxpayers in the consolidated cases now before us.20 Most
significantly, the Court found no "specific indications of
congressional intent" to preempt California's tax:
"First, there is no claim here that the federal tax statutes
themselves provide the necessary pre-emptive force. Second,
although the United States is a party to a great number of tax
treaties that require the Federal Government to adopt some form of
'arm's-length' analysis in taxing the domestic income of
multinational enterprises, that requirement is generally waived
with respect to the taxes imposed by each of the contracting
nations on its own domestic corporations .... Third, the tax
treaties into which the United States has entered do not generally
cover the taxing activities of subnational governmental units such
as States, and in none of the
19 Container Corp. noted:
"We recognize that the fact that legal incidence of a tax falls
on a corporation whose formal corporate domicile is domestic might
be less significant in the case of a domestic corporation that was
owned by foreign interests. We need not decide here whether such a
case would require us to alter our analysis." 463 U. S., at 195, n.
32.
20 Container Corp. observed that "the tax here does not
create an
automatic 'asymmetry' ... in international
taxation,"
id., at 194-195, quoting
Japan Line, 441
U. S., at 453-i.
e., it does not inevitably lead to double
taxation. See
supra, at 319-320, and n. 17. Furthermore,
Colgate, Barcal, and BBl are "without a doubt amenable to be taxed
in California in one way or another," and "the amount of tax [they]
pa[y] is much more the function of California's tax rate than of
its allocation method." 463 U. S., at 195.
322
322 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
treaties does the restriction on 'non-arm's-length' methods of
taxation apply to the States. Moreover, the Senate has on at least
one occasion, in considering a proposed treaty, attached a
reservation declining to give its consent to a provision in the
treaty that would have extended that restriction to the States.
Finally, ... Congress has long debated, but has not enacted,
legislation designed to regulate state taxation of income."
Id., at 196-197 (footnotes and internal quotation marks
omitted).
The Court again confronted a "one voice" argument in
Wardair
Canada Inc. v.
Florida Dept. of Revenue, 477 U. S. 1 (1986), and
there rejected a Commerce Clause challenge to Florida's tax on the
sale of fuel to common carriers, including airlines. Air carriers
were taxed on all aviation fuel purchased in Florida, without
regard to the amount the carrier consumed within the State or the
amount of its in-state business. The carrier in
Wardair, a
Canadian airline that operated charter flights to and from the
United States, conceded that the challenged tax satisfied the
Complete Auto criteria and entailed no threat of multiple
international taxation. Joined by the United States as
amicus
curiae, however, the carrier urged that Florida's tax
"threaten[ed] the ability of the Federal Government to 'speak with
one voice.'" 477 U. S., at 9. There is "a federal policy," the
carrier asserted, "of reciprocal tax exemptions for aircraft,
equipment, and supplies, including aviation fuel, that constitute
the instrumentalities of international air traffic"; this policy,
the carrier argued, "represents the statement that the 'one voice'
of the Federal Government wishes to make," a statement "threatened
by [Florida's tax]."
Ibid.
This Court disagreed, observing that the proffered evidence
disclosed no federal policy of the kind described and indeed
demonstrated that the Federal Government intended to
permit
the States to impose sales taxes on aviation fuel. The
international convention and resolution and more than 70 bilateral
treaties on which the carrier relied to show a
323
United States policy of tax exemption for the instrumentalities
of international air traffic, the Court explained, in fact
indicated far less: "[W]hile there appears to be an international
aspiration on the one hand to eliminate all impediments to
foreign air travel-including taxation of fuel-the
law as it
presently stands acquiesces in taxation of the sale of that fuel by
political subdivisions of countries."
Id., at 10 (emphasis
in original). Most of the bilateral agreements prohibited the
Federal Government from imposing national taxes on aviation fuel
used by foreign carriers, but none prohibited the States or their
subdivisions from taxing the sale of fuel to foreign airlines. The
Court concluded that "[b]y negative implication arising out of
[these international accords,] the United States has at least
acquiesced in state taxation of fuel used by foreign carriers in
international travel," and therefore upheld Florida's tax.
Id., at 12.
In both
Wardair and
Container Corp., the Court
considered the "one voice" argument only after determining that the
challenged state action was otherwise constitutional. An important
premise underlying both decisions 21 is this:
Congress may more passively indicate that certain state
practices do
not "impair federal uniformity in an area where
federal uniformity is essential,"
Japan Line, 441 U. S., at
448; it need not convey its intent with the unmistakable clarity
required to permit state regulation that discriminates against
interstate commerce or otherwise falls short under
Complete
Auto inspection. See,
e. g., Maine v.
Taylor,
477 U. S. 131,
139 (1986) (requiring an "unambiguous indication of congressional
intent" to insulate "otherwise invalid state legislation" from
judicial dormant Commerce Clause scru-
21 See also
Itel Containers Int'l Corp. v.
Huddleston, 507
U. S. 60, 75 (1993) (upholding Tennessee's tax on lease of
cargo containers used exclusively in international shipping;
because tax in question was not among those proscribed by "various
conventions, statutes, and regulations[,] ... the most rational
inference to be drawn is that thEe] tax, one quite distinct from
the general class of import duties, is permitted").
324
324 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
tiny);
Northwest Airlines, Inc. v.
County of Kent,
510 U. S. 355,
373, and n. 19 (1994) (same).
2
As in
Container Corp. and
Wardair, we discern no
"specific indications of congressional intent" to bar the state
action here challenged. Our decision upholding California's
franchise tax in
Container Corp. left the ball in Congress'
court; had Congress, the branch responsible for the regulation of
foreign commerce, see U. S. Const., Art. I, § 8, cl. 3, considered
nationally uniform use of separate accounting "essential,"
Japan
Line, 441 U. S., at 448, it could have enacted legislation
prohibiting the States from taxing corporate income based on the
worldwide combined reporting method. In the 11 years that have
elapsed since our decision in
Container Corp., Congress has
failed to enact such legislation.
In the past three decades-both before and after
Container
Corp.-Congress, aware that foreign governments were displeased with
States' worldwide combined reporting requirements,22 has on many
occasions studied state taxation
22 The governments of many of our trading partners have
expressed their strong disapproval of California's method of
taxation, as demonstrated by the
amici briefs in support of
Barc1ays from the Government of the United Kingdom, and from the
Member States of the European Communities (Belgium, Denmark,
France, Germany, Greece, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, and Spain) and the governments of Australia,
Austria, Canada, Finland, Japan, Norway, Sweden, and Switzerland.
Barclays has also directed our attention to a series of diplomatic
notes similarly protesting the tax. See,
e. g., App. in No.
92-1384, at A-92 to A-123, A-127 to A-128, A-131 to A-138; see also
p. A-603 (letter from Secretary of State George Schultz to
California Governor Deukmejian (Jan. 30, 1986)) ("The Department of
State has received diplomatic notes complaining about state use of
the worldwide unitary method of taxation from virtually every
developed country in the world."). The British Parliament has gone
further, enacting retaliatory legislation that would, if
implemented, tax United States corporations on dividends they
receive from their United Kingdom subsidiaries. See Finance Act
1985, pt. 2, ch. 1, § 54, and sch. 13, '5 (Eng.), reenacted in
Income and Corporation Taxes Act 1988, pt. 18, ch. 3, § 812 and
sch. 30, n 20, 21 (Eng.).
325
of multinational enterprises.23 The numerous bills introduced
have varied, but all would have prohibited the California reporting
requirement here challenged. One group of bills would have
prohibited States using combined reporting from compelling
inclusion, in the combined reporting group, of corporate affiliates
whose income was derived substan-
23 Pursuant to § 201 of Pub. L. 86-272, 73 Stat. 556, in which
Congress undertook to "make full and complete studies of all
matters pertaining to the taxation ... of interstate commerce ...
by the States," the House Committee on the Judiciary held extensive
hearings on the (primarily domestic) implications of alternative
tax apportionment schemes. See State Income Taxation of Mercantile
and Manufacturing Corporations: Hearings before the Special
Subcommittee on State Taxation of Interstate Commerce of the House
Committee on the Judiciary, 87th Cong., 1st Sess. (1961). The
Subcommittee's comprehensive final Report recommended,
inter
alia, that "formula apportionment be used as the sole method of
dividing income among the States for tax purposes," State Taxation
of Interstate Commerce: Report of the Special Subcommittee on State
Taxation of Interstate Commerce, House Committee on the Judiciary,
H. R. Rep. No. 952, 89th Cong., 1st Sess., 1144 (1965), and that
States be required to refrain from taxing any foreign income exempt
from federal taxation.
Id., at 1135. Congress, however,
enacted no legislation embodying these recommendations.
Congress continued to study and debate this matter over the next
two decades. See Interstate Taxation Act, H. R. 11798 and Companion
Bills:
Hearings before the Special Subcommittee on State Taxation of
Interstate Commerce of the House Committee on the Judiciary, 89th
Cong., 2d Sess. (1966); State Taxation of Interstate Commerce:
Hearings before the Subcommittee on State Taxation of Interstate
Commerce of the Senate Committee on Finance, 93d Cong., 1st Sess.
(1973); Interstate Taxation, S. 1273:
Hearings before the Senate Committee on the Judiciary, 95th
Cong., 1st and 2d Sess. (1977-1978); Recommendations of the Task
Force on Foreign Source Income, House Committee on Ways and Means,
95th Cong., 1st Sess. (Comm. Print 1977); State Taxation of Foreign
Source Income, 1980:
Hearings on H. R. 5076 before the House Committee on Ways and
Means, 96th Cong., 2d Sess. (1980); State Taxation of Interstate
Commerce and Worldwide Corporate Income, Hearings on S. 983 and S.
1688 before the Subcommittee on Taxation and Debt Management
Generally of the Senate Committee on Finance, 96th Cong., 2d Sess.
(1980); Unitary Taxation:
Hearing before the Subcommittee on International Economic Policy
of the Senate Committee on Foreign Relations, 98th Cong., 2d Sess.
(1984).
326
326 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
tially from sources outside the United States.24 Another set
would have barred the States from requiring taxpayers to report any
income that was not subject to
federal income tax; 25 thus,
"foreign source income" of foreign corporations ordinarily would
not be reported. See
supra, at 306, n. 5. None of these
bills, however, was enacted.
The history of Senate action on a United States/United Kingdom
tax treaty, to which we referred in
Container Corp., see 463
U. S., at 196, reinforces our conclusion that Congress implicitly
has
permitted the States to use the worldwide combined
reporting method. As originally negotiated by the President, this
treaty-known as the Convention for Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with Respect to Taxes on Income
and Capital Gains-would have precluded States from requiring that
United Kingdom-controlled corporate taxpayers use combined
reporting to compute their state income. See Art. 9(4), 31 U. S. T.
5670, 5677, T. 1. A. S. No. 9682.26 The Senate
24 See,
e. g., S. 1245, 93d Cong., 1st Sess. (1973); S.
2173, 95th Cong., 1st Sess. (1978); H. R. 6146, 98th Cong., 2d
Sess. (1984); H. R. 4940, 98th Cong., 2d Sess. (1984); S. 3061,
98th Cong., 2d Sess. (1984); S. 1974, 99th Cong., 1st Sess. (1985);
H. R. 3980, 99th Cong., 1st Sess. (1986); S. 1139, 101st Cong., 1st
Sess. (1989); S. 1775, 102d Cong., 1st Sess. (1991).
25 See,
e. g., H. R. 11798, 89th Cong., 1st Sess. (1965);
H. R. 5076, 96th Cong., 1st Sess. (1979); S. 1688, 96th Cong., 1st
Sess. (1979); H. R. 8277, 96th Cong., 2d Sess. (1980); H. R. 1983,
97th Cong., 1st Sess. (1981); H. R. 2918, 98th Cong., 1st Sess.
(1983); S. 1225, 98th Cong., 1st Sess. (1983);
"Except as specifically provided in this Article, in determining
the tax liability of an enterprise doing business in a Contracting
State, or
in a political subdivision or local authority of a
Contracting State, such Contracting State,
political
subdivision, or local authority shall not take into account the
income, deductions, receipts, or outgoings of a related enterprise
of the other Contracting State or of an enterprise of any third
State related to any enterprise of the other Contracting State."
(Emphasis added.)
327
rejected this version of the treaty, 124 Congo Rec. 18670
(1978), and ultimately ratified the agreement, id., at 19076,
"subject to the reservation that the provisions of [Article 9(4)]
... shall not apply to any political subdivision or local authority
of the United States," id., at 18416. The final version of the
treaty prohibited state tax discrimination against British
nationals, Art. 2(4), 31 U. S. T. 5671; Art. 24, id., at
5687-5688,27 but did not require States to use separate accounting
or water's edge apportionment of income, id., at 5709.
Given these indicia of Congress' willingness to tolerate States'
worldwide combined reporting mandates, even when those mandates are
applied to foreign corporations and domestic corporations with
foreign parents, we cannot conclude that "the foreign policy of the
United States-whose nuances ... are much more the province of the
Executive Branch and Congress than of this Court-is [so] seriously
threatened,"
Container Corp., 463 U. S., at 196, by
California's practice as to warrant our intervention.28 For this
reason, Barclays' and its
amici's argument that California's
worldwide combined reporting requirement is unconstitutional
because it is
27 Article 2(4) provides: "For the purpose of Article 24
(Nondiscrimination), this Convention shall also apply to taxes of
every kind and description imposed by each Contracting State, or by
its political subdivisions or local authorities."
28 That "federal law has long embodied a
preference for
the arm's length method, in the sense that this method is used in
computing the federal income tax liability of multinational
corporations," does not render a State's use of a different method
unconstitutional, as the Solicitor General points out. Brieffor
United States as
Amicus Curiae 17-18 (emphasis in original),
citing
Mobil Oil Corp. v.
Commissioner of Taxes
ofVt., 445 U. S.
425, 448 (1980) ("Concurrent federal and state taxation of
income, of course, is a well-established norm. Absent some explicit
directive from Congress, we cannot infer that treatment of foreign
income at the federal level mandates identical treatment by the
States.").
328
328 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
likely to provoke retaliatory action by foreign governments 29
is directed to the wrong forum. The judiciary is not vested with
power to decide "how to balance a particular risk of retaliation
against the sovereign right of the United States as a whole to let
the States tax as they please."
Id., at 194.
3
To support its argument that California's worldwide combined
reporting method impermissibly interferes with the Federal
Government's ability to "speak with one voice," and to distinguish
Container Corp., Colgate points to a series of Executive
Branch actions, statements, and
amicus filings, made both
before and after our decision in
Container Corp.30 Colgate
contends that, taken together, these Executive pronouncements
constitute a "clear federal directive" proscribing States' use of
worldwide combined reporting. Brief for Petitioner in No. 92-1839,
p. 36, quoting
Container Corp., 463 U. S., at 194.
The
Executive statements to which Colgate refers,
however, cannot perform the service for which Colgate would
29 See,
e. g., Brief for Petitioner in No. 92-1384, at
25-28; Brief for Government of United Kingdom as
Amicus
Curiae in No. 92-1384, at 19-24; Brief for Member States of
European Communities et al. as
Amici Curiae in No. 92-1384,
pp. 16-17.
30 Colgate cites, for example, President Reagan's decision to
introduce legislation confining States to a water's edge method,
State Taxation of Multinational Corporations, 21 Weekly Compo of
Pres. Doc. 1368 (Nov. 8, 1985) (statement of President Reagan);
letters sent by members of the Reagan and Bush administrations to
the Governor of California and the Chairman of the Senate Finance
Committee, expressing the Federal Government's opposition to
worldwide combined reporting, App. in No. 92-1839, pp. 9-27; and
Department of Justice
amicus briefs filed in this Court,
arguing that the worldwide combined reporting method violates the
dormant Commerce Clause,
e. g., Brief for United States as
Amicus Curiae in
Chicago Bridge &
Iron CO.
V.
Caterpillar Tractor Co., O. T. 1982, No. 81-349, cert.
dism'd, 463 U. S. 1220 (1983); Brieffor United States as
Amicus
Curiae in
Barclays Bank PLC V.
Franchise Tax Bd. of
Cal., O. T. 1992, No. 92-212, cert. denied, 506 U. S. 870
(1992).
329
enlist them. The Constitution expressly grants Congress, not the
President, the power to "regulate Commerce with foreign Nations."
U. S. Const., Art. I, §8, cl. 3. As we have detailed,
supra,
at 324-327, and nn. 23-27, Congress has focused its attention on
this issue, but has refrained from exercising its authority to
prohibit state-mandated worldwide combined reporting. That the
Executive Branch proposed legislation to outlaw a state taxation
practice, but encountered an unreceptive Congress, is not evidence
that the practice interfered with the Nation's ability to speak
with one voice, but is rather evidence that the preeminent speaker
decided to yield the floor to others. Cf.
Itel Containers Int'l
Corp. v.
Huddleston, 507 U. S. 60, 81 (1993)
(SCALIA, J., concurring in part and concurring in judgment) ("[The
President] is better able to decide than we are which state
regulatory interests should currently be subordinated to our
national interest in foreign commerce. Under the Constitution,
however, neither he nor we were to make that decision, but only
Congress.").
Congress may "delegate very large grants of its power over
foreign commerce to the President," who "also possesses in his own
right certain powers conferred by the Constitution on him as
Commander-in-Chief and as the Nation's organ in foreign affairs."
Chicago &
Southern Air Lines, Inc. v.
Waterman S. S.
Corp., 333 U. S. 103, 109
(1948). We need not here consider the scope of the President's
power to preempt state law pursuant to authority delegated by a
statute or a ratified treaty; nor do we address whether the
President may displace state law pursuant to legally binding
executive agreements with foreign nations 31 made "in the absence
of either a congressional grant or denial of authority, [where] he
can only rely upon his own independent powers."
Youngstown
Sheet &
Tube Co. v.
Sawyer, 343 U. S. 579, 637 (1952)
(Jackson, J., concurring). The Executive Branch ac-
31 See
United States v.
Belmont, 301 U. S. 324, 331-332
(1937).
330
330 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
tions-press releases, letters, and
amicus briefs-on which
Colgate here relies are merely precatory. Executive Branch
communications that express federal policy but lack the force of
law cannot render unconstitutional California's otherwise valid,
congressionally condoned, use of worldwide combined
reporting.32
***
The Constitution does "'not make the judiciary the overseer of
our government.'"
Dames &
Moore v.
Regan,
453 U. S. 654, 660 (1981), quoting
Youngstown Sheet
&
Tube Co. v.
Sawyer, 343 U. S., at 594
(Frankfurter, J., concurring). Having determined that the taxpayers
before us had an adequate nexus with the State, that worldwide
combined reporting led to taxation which was fairly apportioned,
nondiscriminatory, fairly related to the services provided by the
State, and that its imposition did not result inevitably in
multiple taxation,
32 The Solicitor General suggests that when a court analyzes
"whether a state tax impairs the federal government's ability to
speak with one voice ... the statements of executive branch
officials are entitled to substantial evidentiary weight," Brief
for United States as
Amicus Curiae 19, but he argues that
the constitutionality of a State's taxing practice must be assessed
according to the federal policy, if any, in effect at the time the
challenged taxes were assessed. He asserts that federal officials
had not articulated a policy opposing use by the States of
worldwide combined reporting prior to the mid-1980's, and urges the
Court to affirm the judgments below on the ground that California's
use of worldwide combined reporting was not unconstitutional during
the years here at issue, even if it became unconstitutional in
later years (a question on which he takes no position, see Tr. of
Oral Arg. 38-41). Colgate, on the other hand, suggests that the
relevant time frame is "when the tax is definitively enforced by
the state taxing authority, through judicial proceedings if
necessary, not when the tax technically accrues under state law,"
Reply Brief for Petitioner in No. 92-1839, p. 7, and argues in the
alternative that a federal policy opposing combined worldwide
reporting had been established as of
1970-1973, id., at 9.
We need not resolve this dispute, because we have concluded that
the Executive statements criticizing States' use of worldwide
combined reporting do not, in light of Congress' acquiescence in
the States' actions, authorize judicial intervention here.
331
we leave it to Congress-whose voice, in this area, is the N
ation's-to evaluate whether the national interest is best served by
tax uniformity, or state autonomy. Accordingly, the judgments of
the California Court of Appeal are
Affirmed.
JUSTICE BLACKMUN, concurring.
Last Term, in
Itel Containers Int'l Corp. v.
Huddleston, 507
U. S. 60, 85 (1993) (BLACKMUN, J., dissenting), I expressed my
disagreement with the Court's willingness, in applying the "one
voice" test, to "infe[r] permission for [a] tax from Congress'
supposed failure to prohibit it." See also
Wardair Canada
Inc. v.
Florida Dept. of Revenue, 477 U. S. 1, 18 (1986)
(BLACKMUN, J., dissenting). I accordingly would not rely in the
present cases on congressional inaction to conclude that "Congress
implicitly has
permitted the States to use the worldwide
combined reporting method."
Ante, at 326. Nevertheless,
because today's holding largely is controlled by
Container Corp.
of America v.
Franchise Tax Bd., 463 U. S. 159 (1983), and
because California's corporate franchise tax does not directly
burden the instrumentalities of foreign commerce, see
Itel,
supra; Wardair, supra; and
Japan Line, Ltd. v.
County
of Los Angeles, 441 U. S. 434 (1979), I
agree that the tax does not "impair federal uniformity in an area
where federal uniformity is essential," id., at 448. I therefore
join the opinion of the Court.
JUSTICE SCALIA, concurring in part and concurring in the
judgment.
I concur in the judgment of the Court and join all of its
opinion except Part IV -B, which disposes of the petitioners'
"negative" Foreign Commerce Clause argument by applying the "speak
with one voice" test of
Japan Line, Ltd. v.
County of Los
Angeles, 441 U.
S. 434 (1979).
As I stated last Term in
Itel Containers Int'l Corp. v.
Huddleston, 507
U. S. 60, 78 (1993) (opinion concurring in part
332
332 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
Opinion of O'CONNOR, J.
and concurring in judgment), "I will enforce a self-executing,
'negative' Commerce Clause in two circumstances: (1) against a
state law that facially discriminates against interstate [or
foreign] commerce, and (2) against a state law that is
indistinguishable from a type of law previously held
unconstitutional by this Court."
Id., at 78-79 (footnote
omitted). Absent one of these circumstances, I will permit the
States to employ whatever means of taxation they choose insofar as
the Commerce Clause is concerned. Neither circumstance exists here,
and the California tax therefore survives Commerce Clause
attack.
I am not sure that the Court's opinion today, which requires no
more than legislative inaction to establish that "Congress
implicitly has
permitted" the States to impose a particular
restriction on foreign commerce,
ante, at 326, will prove
much different from my approach in its consequences. It is,
moreover, an unquestionable improvement over
Itel: whereas
the "speak with one voice" analysis of that opinion gave the power
to determine the constitutionality of a state law to the Executive
Branch, see 507 U. S., at 80 (SCALIA, J., concurring in part and
concurring in judgment), today's opinion restores the power to
Congress-albeit in a form that strangely permits it to be exercised
by silence.
JUSTICE O'CONNOR, with whom JUSTICE THOMAS joins, concurring in
the judgment in part and dissenting in part.
I joined Justice Powell in dissent in
Container Corp. of
America v.
Franchise Tax Bd., 463 U. S. 159 (1983), and
I continue to think the Court erred in upholding California's use
of worldwide combined reporting in taxing the income of a
domestic-based corporate group. But because the State and private
parties have justifiably relied on the constitutionality of taxing
such corporations, and Congress has not seen fit to override our
decision, I agree with the Court that
Container Corp. should
not be overruled, cf.
Quill Corp. v.
North Dakota,
504 U. S. 298,
318-319 (1992), and that it
333
resolves the constitutional challenge raised by
ColgatePalmolive. I therefore concur in the judgment in No. 921839.
Barclays Bank, on the other hand, is a
foreign-based parent
company of a multinational corporate group, and our holding in
Container Corp. expressly does not extend to this situation.
See 463 U. S., at 189, n. 26, and 195, n. 32. In my view, the
California tax cannot constitutionally be applied to foreign
corporations. I therefore respectfully dissent in No. 92-1384.
A state tax on interstate commerce must meet four requirements
under our negative Commerce Clause precedents: the tax must be on
an activity with a substantial nexus to the taxing State, it must
be fairly apportioned, it must not discriminate against interstate
commerce, and it must be fairly related to the services provided by
the State.
Complete Auto Transit, Inc. v.
Brady,
430 U. S. 274,
279 (1977). Substantially for the reasons explained by the Court,
see
ante, at 311-314, I agree that imposition of the
California tax complies with the four
Complete Auto factors.
(I also agree that California's practice of accepting "reasonable
approximations" of the statutorily required financial data does not
violate due process. See
ante, at 314-316.) A state tax on
foreign commerce, however, must satisfy two additional
inquiries: "first, whether the tax, notwithstanding apportionment,
creates a substantial risk of international multiple taxation, and,
second, whether the tax prevents the Federal Government from
'speaking with one voice when regulating commercial relations with
foreign governments.' If a state tax contravenes
either of
these precepts, it is unconstitutional under the Commerce Clause."
Japan Line, Ltd. v.
County of Los Angeles, 441 U. S. 434, 451 (1979)
(emphasis added).
I am in general agreement with the Court, see
ante, at
320-329, that the second
Japan Line factor-the purported
need for federal uniformity-does not prevent the use of worldwide
combined reporting in taxing foreign corpora-
334
334 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
Opinion of O'CONNOR, J.
tions. The Congress, not the Executive or the Judiciary, has
been given the power to regulate commerce. U. S. Const., Art. I, §
8, cl. 3. The Legislature has neither approved nor disapproved the
California tax. Although in such circumstances courts have the
power to scrutinize taxes for consistency with our negative
Commerce Clause jurisprudence, this determination should be made on
the basis of the objective factors outlined in
Complete Auto
(and, in the foreign commerce context, the multiple taxation
analysis discussed in
Japan Line), not statements made and
briefs filed by officials in the Executive Branch. Cf.
Itel
Containers Int'l Corp. v.
Huddleston, 507 U. S. 60, 80-81 (1993)
(SCALIA, J., concurring in part and concurring in judgment).
Indeed, the inconsistent positions taken by the Solicitor General
in the course of Barclays' challenge to the California tax
illustrate the perils of resting constitutional determinations on
such "evidence." Compare Brief for United States as
Amicus
Curiae 21-24 (arguing that the California tax was
constitutionally applied to Barclays during the tax years in
question), with Brief for United States as
Amicus Curiae in
Barclays Bank v.
Franchise Tax Board, O. T. 1992, No.
92212, pp. 9-16 (arguing that the imposition of the California tax
on Barclays was unconstitutional).
But I cannot agree with the Court's resolution of the other
Japan Line factor-the need to avoid international multiple
taxation. See
ante, at 316-320. Barclays does 98% of its
business in countries other than the United States. California,
through application of worldwide combined reporting, taxes some of
that income. The trial court found as a fact that "[t]here is a
definite risk of, as well as actual double taxation here." App. to
Pet. for Cert. in No. 92-1384, p. A-25. This double taxation occurs
because California has adopted a taxing system that is inconsistent
with the taxing method used by foreign taxing authorities.
California's formula assigns a higher proportion of income to
jurisdictions where wage rates, property values, and sales prices
are
335
higher; to the extent that California is such a jurisdiction
(and it usually will be) the formula inherently leads to double
taxation. And whenever the three factors are higher in California,
the State will tax income under its formula that already has been
taxed by another country under accepted international practice.
In
Container Corp., we recognized that the California tax
"ha[d] resulted in actual double taxation ... stem[ming] from a
serious divergence in the taxing schemes adopted by California and
the foreign taxing authorities," and that "the taxing method
adopted by those foreign taxing authorities is consistent with
accepted international practice." 463 U. S., at 187. We
nevertheless held that the tax did not violate the
Japan
Line principle. Two of the factors on which we relied-that the
tax was on income rather than property, and that the multiple
taxation was not "inevitable"-carry no more force today than they
did 11 Terms ago, see 463 U. S., at 198-201 (Powell, J.,
dissenting), but they are present here as well.
We also relied on a third ground to distinguish the tax upheld
in
Container Corp. from the tax invalidated in
Japan
Line: "[T]he tax here falls, not on the foreign owners of an
instrumentality of foreign commerce, but on a corporation domiciled
and headquartered in the United States. We specifically left open
in
Japan Line the application of that case to 'domestically
owned instrumentalities engaged in foreign commerce,' and ... this
case falls clearly within that reservation." 463 U. S., at 188-189,
quoting
Japan Line, supra, at 444, n. 7 (citation omitted).
In a footnote, we continued: "We have no need to address in this
opinion the constitutionality of [the California tax] with respect
to state taxation of domestic corporations with foreign parents or
foreign corporations with either foreign parents or foreign
subsidiaries." 463 U. S., at 189, n. 26; see also id., at 195, and
n. 32. As the Court recognizes,
ante, at 317, and n. 15,
Barclays' challenge to the California tax therefore presents the
question we ex-
336
336 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
Opinion of O'CONNOR, J.
pressly left open in
Container Corp.: does it make a
constitutional difference that the multiple taxation resulting from
California's use of worldwide combined reporting falls on a foreign
corporation rather than a domestic one? In my view, the answer is
yes.
Japan Line teaches that where the instrumentality of
commerce-and analogously, the corporate domicile-is foreign, the
multiple taxation resulting from a state taxing scheme may violate
the Commerce Clause even though the same tax would be
constitutional as applied to a domestic corporation. 441 U. S., at
447-448. When worldwide combined reporting is applied to American
corporate groups with foreign affiliates, as in
Container
Corp., income attributable to those foreign companies will be
taxed by California, even though they are also subject to tax in
foreign countries. But in such cases the incidence of the tax falls
on the domestic parent corporation-a corporation subject to full
taxation in the United States notwithstanding the source of its
income. When the California tax is applied to a foreign corporate
group with both domestic and foreign affiliates, some of the income
of the foreign companies will also be taxed by California. The
incidence of the tax in such cases falls on a
foreign
corporation, even though the United States (and its subnational
governments) is entitled to tax only the income earned
domestically.
In my view, the States are prohibited (absent express
congressional authorization) by the Foreign Commerce Clause from
adopting a system of taxation that, because it does not conform to
international practice, results in multiple taxation of foreign
corporations. It may be that such a rule "leave[s] California free
to discriminate against a Delaware corporation in favor of an
overseas corporation,"
Container Corp., 463 U. S., at 203
(Powell, J., dissenting), but the reason for this differential
treatment is obvious. Domestic taxpayers have access to the
political process, at both the state and national levels, that
foreign taxpayers simply do not enjoy.
337
If California's tax results in intolerable double taxation of
domestic corporations, those companies can seek redress through the
normal channels. Cf.
Minnesota v.
Clover Leaf Creamery
Co., 449 U. S.
456, 473, n. 17 (1981);
Raymond Motor Transp., Inc. v.
Rice, 434 U.
S. 429, 444, n. 18 (1978). It is all too easy, however, for the
state legislature to fill the State's coffers at the expense of
outsiders.
Most of the United States' trading partners have objected to
California's use of worldwide combined reporting. See Demarche from
Danish Embassy, on behalf of Governments of European Community
(Mar. 26, 1993) ("The views of the EC Member States on worldwide
unitary taxation are well known to the United States Government.
All Member States have expressed their strong opposition to [the
California] tax in a number of diplomatic communiques to the United
States Government from 1980 to the present date"); Demarche from
Belgian Embassy, on behalf of Governments of Member States of
European Community and of Australia, Austria, Canada, Finland,
Japan, Norway, Sweden, and Switzerland (Sept. 23, 1993). At least
one country has already enacted retaliatory legislation. See Brief
for Government of United Kingdom as
Amicus Curiae 19-23.
Moreover, the possibility of multiple taxation undoubtedly deters
foreign investment in this country. See Brief for Member States of
European Communities et al. as
Amici Curiae 14-16. These
adverse consequences, which affect the Nation as a whole, result
solely from California's refusal to conform its taxing practices to
the internationally accepted standard.
Unlike the Court, see
ante, at 319, I would not dismiss
these difficulties solely by relying on our observation in
Container Corp. that "it would be perverse, simply for the
sake of avoiding double taxation, to require California to give up
one allocation method that sometimes results in double taxation in
favor of another allocation method that also sometimes results in
double taxation." 463 U. S., at 193. In addition to being factually
incorrect, see id., at 199, n. 1 (Powell, J.,
338
338 BARCLAYS BANK PLC
v. FRANCHISE TAX BD. OF CAL.
Opinion of O'CONNOR, J.
dissenting), our discussion of alternatives in
Container
Corp. proceeded from the well-established proposition that
States need not conform their taxing practices to those of their
neighbors, at least so far as domestic commerce is concerned. See,
e. g., Moorman Mfg. Co. v.
Bair, 437 U. S. 267, 277-281
(1978). Multiple taxation of domestic companies is avoided, to the
extent necessary, by the fair apportionment requirement. See
Container Corp., supra, at 185;
General Motors Corp.
v.
Washington, 377 U. S. 436, 440
(1964).
But in
Japan Line we squarely rejected the argument that
the same principle applies to taxes imposed on foreignowned
instrumentalities:
"[N]either this Court nor this Nation can ensure full
apportionment when one of the taxing entities is a foreign
sovereign. If an instrumentality of commerce is domiciled abroad,
the country of domicile may have the right, consistently with the
custom of nations, to impose a tax on its full value. If a State
should seek to tax the same instrumentality on an apportioned
basis, multiple taxation inevitably results .... Due to the absence
of an authoritative tribunal capable of ensuring that the
aggregation of taxes is computed on no more than one full value, a
state tax, even though 'fairly apportioned' to reflect an
instrumentality's presence within the State, may subject foreign
commerce to the risk of a double tax burden to which [domestic]
commerce is not exposed, and which the commerce clause forbids."
441 U. S., at 447-448 (footnote and internal quotation marks
omitted).
In my view, the risk of multiple taxation created by
California's use of worldwide combined reporting-a risk that has
materialized with respect to Barclays-is sufficient to render the
California tax constitutionally infirm. I therefore respectfully
dissent from the Court's conclusion to the contrary.
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