                                                                                       ACCEPTED
                                                                                   03-15-00113-CV
                                                                                           5110259
                                                                        THIRD COURT OF APPEALS
                                                                                   AUSTIN, TEXAS
                                                                              4/30/2015 6:02:54 PM
                                                                                 JEFFREY D. KYLE
                                                                                            CLERK
                        No. 03-15-00113-CV
__________________________________________________________________
                                                             FILED IN
                        In the Court of Appeals      3rd COURT OF APPEALS
                     For the Third Judicial District     AUSTIN, TEXAS
                                                     4/30/2015 6:02:54 PM
                             Austin, Texas
                                                       JEFFREY D. KYLE
__________________________________________________________________
                                                             Clerk

                        EMC CORPORATION

                               Appellant,

                                   v.
     GLENN HEGAR, COMPTROLLER OF PUBLIC ACCOUNTS OF
       THE STATE OF TEXAS, AND KEN PAXTON, ATTORNEY
              GENERAL OF THE STATE OF TEXAS

                             Appellees.
__________________________________________________________________
      ON APPEAL FROM THE 353RD DISTRICT COURT, TRAVIS COUNTY, TEXAS
                TRIAL COURT CAUSE NO. D-1-GN-14-000851
__________________________________________________________________
                       APPELLANT’S BRIEF
__________________________________________________________________
                                        RYAN LAW FIRM, LLP
                                        Doug Sigel
                                        Texas Bar No. 18347650
                                        Doug.Sigel@RyanLawLLP.com
                                        Ryan Cotter
                                        Texas Bar No. 24075969
                                        Ryan.Cotter@RyanLawLLP.com
                                        100 Congress Avenue, Suite 950
                                        Austin, Texas 78701
April 30, 2015                          Attorneys for Appellant

                  ORAL ARGUMENT IS REQUESTED
                             Identity of the Parties and Counsel

Appellant

    EMC Corporation

Counsel for Appellant

    Doug Sigel
    Ryan Cotter
    Ryan Law Firm, LLP
    100 Congress Avenue, Suite 950
    Austin, Texas 78701
    512.459.6600 Telephone
    512.459.6601 Facsimile
    Doug.Sigel@RyanLawLLP.com
    Ryan.Cotter@RyanLawLLP.com

Appellees

    Glenn Hegar, Comptroller of Public Accounts of the State of Texas
    Ken Paxton, Attorney General of the State of Texas

Counsel for Appellees

    Rance Craft
    Assistant Solicitor General
    Charles K. Eldred
    Assistant Attorney General
    Office of the Attorney General
    P.O. Box 12548 (MC 059)
    Austin, Texas 78711-2548
    512.936.2872 Telephone
    512.474.2697 Facsimile
    rance.craft@texasattorneygeneral.gov
    charles.eldred@texasattorneygeneral.gov




Appellant’s Brief – Page i
                                                    Table of Contents
Identity of the Parties and Counsel ....................................................................................... i
Table of Contents................................................................................................................. ii
Table of Authorities ............................................................................................................ iii
Appendix ............................................................................................................................ vi
Statement of the Case .......................................................................................................... 1
Statement Regarding Oral Argument .................................................................................. 1
Issues Presented ................................................................................................................... 1
Statement of Facts ............................................................................................................... 2
Summary of the Argument .................................................................................................. 4
Standards of Review ............................................................................................................ 6
Argument ............................................................................................................................. 7
         Appellant is entitled to compute its franchise tax using the Multistate
         Tax Compact apportionment formula. ....................................................................... 7
               The plain language of Texas Tax Code §§ 141.001 and
               171.106(a) is unambiguous. ................................................................................ 9
               The Legislature did not impliedly repeal the Multistate Tax
               Compact when it enacted the revised franchise tax. ......................................... 10
         Texas cannot unilaterally repeal selected provisions of the Multistate
         Tax Compact because it is a binding interstate compact. ........................................ 11
               Texas may not unilaterally modify the terms of a contract. ............................. 12
               The Multistate Tax Compact is a valid and binding interstate
               compact. ............................................................................................................ 13
               Texas did not withdraw from the Multistate Tax Compact. ............................. 14
         The Multistate Tax Compact election applies because the Texas
         franchise tax is an income tax. ................................................................................. 15
               The Michigan Supreme Court, in an identical case, held that
               taxpayer was entitled to use the Multistate Tax Compact’s three-
               factor apportionment formula. .......................................................................... 16
               The Georgia Tax Tribunal held that the Texas Franchise Tax is
               an income tax. ................................................................................................... 18
         Disallowing taxpayers an election under the Multistate Tax Compact
         violates the United States and Texas Constitutions. ................................................ 20
Conclusion ......................................................................................................................... 22
Certificate of Compliance .................................................................................................. 23

Appellant’s Brief – Page ii
Certificate of Service ......................................................................................................... 23


                                                Table of Authorities

CASES
Appraisal Review Bd. v. Spencer Square Ltd.,
  252 S.W.3d 842 (Tex. App.—Houston [14th Dist.] 2008, no pet.) .......................7

Combs v. Health Care Serv. Corp,
    401 S.W.3d 623 (Tex. 2013) ...........................................................................8

Combs v. Roark Amusement & Vending, L.P.,
    422 S.W.3d 632 (Tex. 2013) .......................................................................7, 8

Dodd v. State,
     650 S.W.2d 129 (Tex. App.—Houston [14th Dist.] 1983, no writ) ...............10

H. Alan Rosenberg v. Comm'r,
      No. 1414626 (GA Nov. 25, 2014) .......................................................... 19, 20

Hans Rees’ Sons, Inc. v. North Carolina ex rel. Maxwell,
     283 U.S. 123 (1931).......................................................................................20

Hess v. Port Auth. Trans-Hudson Corp.,
      513 U.S. 30 (1994).........................................................................................12

Houston Indep. Sch. Dist. v. S.W. Bell Tel. Co.,
     376 S.W.2d 375 (Tex. App.—Austin, 1964),
     rev’d on other grounds by 397 S.W.2d 419 (Tex. 1965) ..............................10

In re E.I. du Pont de Nemours and Co.,
       92 S.W.3d 517 (Tex. 2002) .............................................................................6

In re Office of the Attorney Gen.,
       422 S.W.3d 623 (Tex. 2013) ...........................................................................8

In re VanDeWater,
       966 S.W.2d 730 (Tex. App.—San Antonio 1998) (orig. proceeding) ............8


Appellant’s Brief – Page iii
Int’l Serv. Ins. Co. v. Jackson,
       335 S.W.2d 420 (Tex. App.—Austin, 1960, writ ref’d n.r.e.) ......................11

Int'l Bus. Machines Corp. v. Dep't of Treasury,
       852 N.W.2d 865 (2014) .......................................................................... 16, 17

Jones v. Williams,
      45 S.W.2d 130 (Tex. 1931) .............................................................................9

Maverick v. Ruiz,
     897 S.W.2d 843 (Tex. App.—San Antonio 1995, no writ).............................9

Mid South Telecomm. Co. v. Best,
     184 S.W.3d 386 (Tex. App—Austin 2006, no pet.) ........................................6

Norfolk & W. Ry. Co. v. Missouri State Tax Comm’n,
      390 U.S. 317 (1968).......................................................................................21

State ex rel. Dyer v. Sims,
       341 U.S. 22 (1951).........................................................................................13

Tex. Adjutant Gen.’s Office v. Ngakoue,
      408 S.W.3d 350 (Tex. 2013) ...........................................................................8

TGS-NoPec Geophysical Co. v. Combs,
     340 S.W.3d 432 (Tex. 2011) ...........................................................................8

TracFone Wireless, Inc. v. Comm’n on State Emergency Commc’ns,
     397 S.W.3d 173 (Tex. 2013) ...........................................................................8

U.S. Steel Corp. v. Multistate Tax Comm’n,
      434 U.S. 452 (1978)................................................................................ 13, 14

Valence Operating Co. v. Dorsett,
      164 S.W.3d 656 (Tex. 2005) ...........................................................................6

Walker v. Packer,
     827 S.W.2d 833 (Tex. 1992) ...........................................................................7




Appellant’s Brief – Page iv
STATUTES
Tex. Tax Code § 141.001 ................................................................................. passim

Tex. Tax Code § 141.001, Art. II, ¶ 4 ..................................................................6, 15

Tex. Tax Code § 141.001, Art. II, ¶ 6 ......................................................................16

Tex. Tax Code § 141.001, Art. III, ¶ 1 ........................................................... 4, 9, 10

Tex. Tax Code § 141.001, Art. IV .................................................................. 7, 9, 21

Tex. Tax Code § 141.001, Art. X ............................................................................14

Tex. Tax Code § 171.106(a) ............................................................................ passim

U.S. Const. art. I, § 8................................................................................................21

U.S. Const. art. I, § 10..........................................................................................5, 14


OTHER
Frederick L. Zimmermann & Mitchell Wendell,
      The Law and Use of Interstate Compacts, The Council of
      State Governments, January 1976 ...........................................................11, 12




Appellant’s Brief – Page v
                                       Appendix


 1.        Final Judgment

 2.        Tex. Tax Code § 141.001 (Vernon 2002).

 3.        Tex. Tax Code § 171.106 (Vernon 2002).

 4.        Tex. Tax Code § 112.151 (Vernon 2002).

 5.        Tex. Const. art. I, §16.

 6.        U.S. Const. art. I, § 10.

 7.        Int'l Bus. Machines Corp. v. Dep't of Treasury, 852 N.W.2d 865 (2014).

 8.        H. Alan Rosenberg v. Douglas J. Macginnittie, Commissioner, Georgia
           Department of Revenue, No. 1414626 (GA Nov. 25, 2014).




Appellant’s Brief – Page vi
                              Statement of the Case

Nature of underlying case:    Franchise tax refund suit under Chapters 112, 141,
                              and 171 of the Texas Tax Code.

Trial court:                  The 353rd Judicial District Court of Travis County,
                              Texas, specially assigned to the Honorable Darlene
                              Byrne

Course of Proceedings:        Both Parties filed cross-motions for summary
                              judgment.

Disposition:                  The trial court denied Appellant’s motion for
                              summary judgment and granted Appellees’ cross-
                              motion for summary judgment on February 18, 2015.
                              Clerk’s Record (CR) 1172; Appendix, Tab 1.

                        Statement Regarding Oral Argument

       EMC Corporation (“EMC”) requests oral argument. The underlying dispute

involves proper application of the Multistate Tax Compact to the revised Texas

Franchise Tax. Oral argument would aid the Court’s determination of this case.


                                 Issues Presented

       The central question in this case is whether, under Chapters 141 and 171 of

the Texas Tax Code, Appellant is entitled to apportion margin using the Multistate

Tax Compact apportionment formula, adopted and codified by Texas, for report

years 2010 through 2012. To resolve this question, the following issues are

presented:




Appellant’s Brief – Page 1
        1.    Whether the enactment of Section 171.106(a), containing the Texas

   apportionment formula, constitutes an implied repeal of the codification of the

   Multistate Tax Compact in Sections 141.001, arts. III, IV.

        2.    Whether the Multistate Tax Compact is a binding compact on all party

   states, including Texas, which may not be unilaterally altered by Texas.

        3.    Whether the Texas Franchise Tax is an “income tax” as defined by

   and within the scope of the Multistate Tax Compact.

        4.    Whether disallowing Appellant’s election to use the Multistate Tax

   Compact apportionment formula violates the United States and Texas

   Constitutions.

                                Statement of Facts

        The material facts regarding EMC’s business done in Texas are not in

dispute. EMC is a Massachusetts-based corporation authorized to conduct

business in Texas. (CR 4.) EMC sells information technology hardware and cloud

storage solutions to customers nationwide, including customers in Texas. (CR

715.) EMC only engages in retail and wholesale activities in Texas. (Id.) During

the periods at issue, EMC engaged in a multistate, unitary business and determined

that a portion of its United States income was subject to Texas franchise tax. (CR

716.)




Appellant’s Brief – Page 2
       EMC timely filed its franchise tax reports for report years 2010 through

2012. (CR 721-1045.) During the relevant report years, EMC paid the following

amounts in franchise tax:

       $2,959,318.74 for 2010 Report Year

       $4,982,013.01 for 2011 Report Year

       $5,666,394.62 for 2012 Report Year

(CR 717.)

       In its original reports, EMC apportioned its margin using the single-factor

apportionment formula in Tex. Tax Code § 171.106(a). (CR 716.) After learning

of the Multistate Tax Compact’s three-factor apportionment formula election,

adopted and codified as Chapter 141 of the Texas Tax Code, EMC amended and

timely filed franchise tax reports and refund claims for report years 2010, 2011,

and 2012 using the three-factor formula. (CR 717.)

       The Comptroller audited EMC for these report years and denied EMC’s

refund claims. (CR 718.) The Comptroller issued his final decision upholding the

denial of EMC’s refund claims on January 27, 2014. (Id.) EMC’s motion for

rehearing was also denied, after which EMC filed this refund suit in Travis County

District Court on March 20, 2014. (Id.)

       The issues in this case were decided by cross-motions for summary

judgment at the trial court with the Honorable Darlene Byrne presiding. The trial



Appellant’s Brief – Page 3
court issued its final judgment on February 18, 2015, denying EMC’s motion for

summary judgment and granting the Comptroller’s cross-motion for summary

judgment based on the conclusion that EMC was not entitled to apportion its

franchise tax using the Multistate Tax Compact’s three-factor apportionment

formula. (CR 1172; Tab 1.)

                             Summary of the Argument

       EMC properly amended its franchise tax reports electing to compute the tax

using the Multistate Tax Compact apportionment formula for 2010 through 2012

report years. (CR 717-718.) Texas became a party to the Multistate Tax Compact

when it adopted it in 1967 and subsequently codified it in full as Tex. Tax Code

§ 141.001 in 1982. As a party to the Multistate Tax Compact, Texas agreed to be

bound by all of its terms, including the provision permitting taxpayers, such as

EMC, the election to apportion their tax base using either the Multistate Tax

Compact formula or an alternative state formula. Tex. Tax Code § 141.001, Art.

III, ¶ 1. The Texas legislature has not withdrawn from or repealed any part of the

Multistate Tax Compact since it was adopted and codified.

       In 2006, the Texas legislature enacted the franchise tax as Chapter 171 of the

Texas Tax Code to replace the existing earned surplus tax. The revised franchise

tax included a single-factor apportionment formula, which differs from the

Multistate Tax Compact’s three-factor formula. The Texas legislature did not



Appellant’s Brief – Page 4
expressly repeal any part of the Multistate Tax Compact when it enacted the

revised franchise tax in 2006.

       As a matter of statutory construction, the Multistate Tax Compact election

and formula remain in effect because they do not irreconcilably conflict with the

Texas formula. If a taxpayer elects to use the Multistate Tax Compact formula, the

taxpayer apportions franchise tax using the Multistate Tax Compact formula; if the

taxpayer does not elect to use the Multistate Tax Compact formula, it apportions its

franchise tax using the Texas formula. The plain language of Sections 141.001 and

171.106(a) is unambiguous and the Texas legislature has not expressly repealed

any part of the Multistate Tax Compact. Both statutes remain good law.

       Further, the Multistate Tax Compact is a valid and binding interstate

compact, and Texas is prohibited from unilaterally altering its terms without first

withdrawing from the Multistate Tax Compact. The Contracts Clause, Art. I, § 10,

of the United States Constitution protects interstate compacts such as the Multistate

Tax Compact. Under the Contracts Clause, states may not enact any law that

impairs the obligation of contracts. The Appellees’ position mandating application

of the formula in Section 171.106(a) impairs Texas’ contractual obligation to

permit taxpayers an election to apportion franchise tax using the Multistate Tax

Compact formula.




Appellant’s Brief – Page 5
       The Multistate Tax Compact applies to all “income taxes,” which is broadly

defined to include tax on “an amount arrived at by deducting expenses from gross

income, one or more forms of which expenses are not specifically and directly

related to particular transactions.” Tex. Tax Code § 141.001, Art. II, ¶ 4. The

Texas franchise tax is an income tax under the Multistate Tax Compact because its

computation allows for the deduction of expenses that are not specifically and

directly related to particular transactions (e.g. compensation) from gross income

reported on the taxpayer’s federal income tax return. The Multistate Tax Compact

definition of income tax is broader than the common definition, and the Texas

franchise tax fits squarely within it.

                                 Standards of Review

       This Court reviews a trial court’s summary judgment de novo. Valence

Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005). When both parties

move for summary judgment and the trial court grants one motion and denies the

other, this Court must review the summary judgment evidence presented by both

parties, determine all questions of law presented, and render the judgment the trial

court should have rendered. Mid South Telecomm. Co. v. Best, 184 S.W.3d 386,

389-90 Tex. App—Austin 2006, no pet.).

       Statutory construction is a question of law on which the trial court’s views

are not entitled to deference. In re E.I. du Pont de Nemours and Co., 92 S.W.3d



Appellant’s Brief – Page 6
517, 522 (Tex. 2002); see also Walker v. Packer, 827 S.W.2d 833, 840 (Tex. 1992)

(trial court’s reasoning is not entitled to deference because it has no discretion in

deciding what the law is or its proper application). Further, a de novo review is

generally “conducted as if there had been no trial in the first instance.” Appraisal

Review Bd. v. Spencer Square Ltd., 252 S.W.3d 842, 845 (Tex. App.—Houston

[14th Dist.] 2008, no pet.).

                                      Argument

       This Court should reverse the trial court’s judgment denying Appellant’s

motion for summary judgment granting Appellees’ cross-motion for summary

judgment, and render judgment in favor of Appellant that it properly apportioned

its Texas franchise tax pursuant to the Multistate Tax Compact for report years

2010 through 2012.

       Appellant is entitled to compute its franchise tax using the Multistate
       Tax Compact apportionment formula.
       As a matter of statutory construction, Texas taxpayers are entitled to elect to

use the Multistate Tax Compact formula provided in Section 141.001, Art. IV, to

compute their franchise tax, and the apportionment formula provided in Section

171.106(a) is the alternative to the Multistate Tax Compact formula.

       The primary objective in interpreting a statute is to ascertain the legislature’s

intent. Combs v. Roark Amusement & Vending, L.P., 422 S.W.3d 632, 635 (Tex.

2013). Ordinarily, the truest manifestation of what lawmakers intended is what


Appellant’s Brief – Page 7
they enacted. Id. Statutes must be viewed as a whole and read “contextually,

giving effect to every word, clause, and sentence.” Tex. Adjutant Gen.’s Office v.

Ngakoue, 408 S.W.3d 350, 354 (Tex. 2013) (citations omitted) (quoting In re

Office of the Attorney Gen., 422 S.W.3d 623, 629 (Tex. 2013)). If a statute is

unambiguous, the court must adopt the interpretation supported by the plain

language, unless such an interpretation would lead to absurd results. TGS-NoPec

Geophysical Co. v. Combs, 340 S.W.3d 432, 439 (Tex. 2011). In addition, the

Texas Supreme Court held that “we read unambiguous statutes as they are written,

not as they make the most policy sense.” Combs v. Health Care Serv. Corp, 401

S.W.3d 623, 629 (Tex. 2013).

       In a similar vein, “[t]ax policy gap-filling–specifically, deciding who is

taxed–is best left to legislators, not courts or agencies.” TracFone Wireless, Inc. v.

Comm’n on State Emergency Commc’ns, 397 S.W.3d 173, 176 (Tex. 2013). Any

ambiguity in the Tax Code regarding the scope of taxation must be resolved in

favor of taxpayers. Id. at 182.

       When two statutes address the same subject, they should be read together

and harmonized with each other, regardless of whether they refer to one another.

See In re VanDeWater, 966 S.W.2d 730, 732-34 (Tex. App.—San Antonio 1998)

(orig. proceeding). Courts must harmonize apparent conflicts between different

portions of statutes, if practicable, and must favor a construction that renders each



Appellant’s Brief – Page 8
word operative. Maverick v. Ruiz, 897 S.W.2d 843, 846 (Tex. App.—San Antonio

1995, no writ); see also Jones v. Williams, 45 S.W.2d 130, 137 (Tex. 1931).

          The plain language of Texas Tax Code §§ 141.001 and 171.106(a) is
          unambiguous.

       Sections 141.001 and 171.106(a) are unambiguous and both stand separately

as equally enforceable alternative methods of apportionment. Section 141.001,

Art. III, ¶ 1, provides that the taxpayer “may elect to apportion and allocate his

income in the manner provided by the laws of such states and subdivisions without

reference to this compact, or may elect to apportion or allocate in accordance with

Article IV.” Thus, a taxpayer may elect to apportion its franchise tax using the

Multistate Tax Compact formula or forgo the Multistate Tax Compact election and

apportion its franchise tax using the Texas formula.

       There is no overriding mandate in Section 171.106(a) that taxpayers must

use the Texas formula instead of the Multistate Tax Compact formula. Section

171.106 makes no mention of the Multistate Tax Compact or any of its provisions.

Accordingly, the only way in which Sections 171.106 and 141.001 compete or

conflict is that they contain different formulas. However, the fact that two statutes

apparently conflict or compete does not mean an apparent conflict is always

irreconcilable. See Maverick, 897 S.W.2d at 846.

       Rather, permitting taxpayers the option of making an election under Section

141.001 to apportion using the Multistate Tax Compact formula shows that Section

Appellant’s Brief – Page 9
171.106(a) is the alternative method of apportionment. This interpretation

harmonizes the apparent conflict because a taxpayer that does not elect to use the

Multistate Tax Compact formula effectively elects to use the Texas formula. In

other words, both provisions provide equally enforceable alternative calculation

methods depending on the election the taxpayer makes.

          The Legislature did not impliedly repeal the Multistate Tax Compact
          when it enacted the revised franchise tax.

       The only argument to support the Comptroller’s claim that Section

171.106(a) provides a mandatory and exclusive apportionment formula in Texas is

that the Texas legislature impliedly repealed the permissive election contained in

Section 141.001, Art. III, ¶ 1.

       Courts are hesitant to find implied repeal when two statutes can reasonably

be given effect. Houston Indep. Sch. Dist. v. S.W. Bell Tel. Co., 376 S.W.2d 375,

380 (Tex. App.—Austin, 1964), rev’d on other grounds by, 397 S.W.2d 419, 420-

421 (Tex. 1965). “[I]t may be presumed that laws are passed with deliberation,

and with full knowledge of existing ones on the subject.” Id. The presumption

disfavoring implied repeal where express terms are not used is based on the

probability that the legislature would have used express language clearly indicating

the intent to repeal an existing statute. Id.

       Courts only find implied repeal when two statutes at issue are “directly and

irreconcilably in conflict.” Dodd v. State, 650 S.W.2d 129, 130 (Tex. App.—

Appellant’s Brief – Page 10
Houston [14th Dist.] 1983, no writ). “[T]he court will endeavor to harmonize and

reconcile the various provisions and if both acts can stand together, the rule is to let

them stand. The implication must be clear, necessary, irresistible, and free from

reasonable doubt.” Int’l Serv. Ins. Co. v. Jackson, 335 S.W.2d 420, 424 (Tex.

App.—Austin, 1960, writ ref’d n.r.e.).

       The enactment of Section 171.106 did not repeal the Multistate Tax

Compact or any provision thereof. First, Section 171.106 makes no reference to

Section 141.001 or any provision in chapter 141. Second, Section 171.106(a)’s use

of the phrase “Except as provided by this section” is not a clear indication of the

legislature’s implication and is far from reasonable doubt. In addition, Sections

141.001 and 171.106 can be harmonized to reconcile the various provisions and

stand together. This Court should construe the two statutes in favor of the taxpayer

and conclude that Section 171.106(a) did not impliedly repeal Section 141.001.

       Texas cannot unilaterally repeal selected provisions of the Multistate
       Tax Compact because it is a binding interstate compact.
       The “interstate compact is the most binding legal instrument to provide

formal cooperation between the States.” Frederick L. Zimmermann & Mitchell

Wendell, The Law and Use of Interstate Compacts, The Council of State

Governments, at ix, January 1976. Thus, the Multistate Tax Compact is a binding

legal instrument on the State of Texas.




Appellant’s Brief – Page 11
       Not only is the Multistate Tax Compact a statute, it is also a binding

contract:

       Interstate compacts are not only statutes; they also are contracts. This
       means that the substantive law of contracts is applicable to them. This
       is certainly true of the vast body of case law and of the general
       characteristics of contracts which are recognized throughout the
       common law world.

Id. at 2.

       In any event, it should be noted that the compact itself has the force of

statute and, in case of conflict, its provisions would supersede any general statutes

relating to contracts. Id. at 3. Texas is a signing compact member of and party to

the Multistate Tax Compact. (CR 668.) The Multistate Tax Compact is an

interstate compact that is not only law, but is also a contract that cannot be

amended, modified, or otherwise altered without consent of all parties. Hess v.

Port Auth. Trans-Hudson Corp., 513 U.S. 30, 42 (1994). “If it has been enacted by

statute, legislative alteration or repeal is necessary.” Zimmermann & Wendell,

supra, at 3.

            Texas may not unilaterally modify the terms of a contract.

       EMC properly elected the Multistate Tax Compact’s three-factor

apportionment formula because Texas is contractually obligated to offer taxpayers

the election.




Appellant’s Brief – Page 12
       Signing compact members of the Multistate Tax Compact, such as the state

of Texas, are contractually obligated to offer taxpayers the option to use the three-

factor apportionment formula. “It requires no elaborate argument to reject the

suggestion that an agreement solemnly entered into between States by those who

alone have political authority to speak for a State can be unilaterally nullified, or

given final meaning by an organ of one of the contracting States.” State ex rel.

Dyer v. Sims, 341 U.S. 22, 28 (1951). Members may not unilaterally ignore or

repeal specific portions of the Multistate Tax Compact without first withdrawing

from the Multistate Tax Compact. Texas has neither withdrawn from the

Multistate Tax Compact nor repealed its enacting legislation in Section 141.001.

          The Multistate Tax Compact is a valid and binding interstate
          compact.

       In U.S. Steel Corp. v. Multistate Tax Commission, the U.S. Supreme Court

stated:

       The Multistate Tax Compact was entered into by a number of States
       for the stated purposes of (1) facilitating proper determination of state
       and local tax liability of multistate taxpayers; (2) promoting
       uniformity and compatibility in state tax systems; (3) facilitating
       taxpayer convenience and compliance in the filing of tax returns and
       in other phases of tax administration; and (4) avoiding duplicative
       taxation.

U.S. Steel Corp. v. Multistate Tax Comm’n, 434 U.S. 452, 452 (1978).




Appellant’s Brief – Page 13
Further, the Supreme Court held that the Multistate Tax Compact was valid despite

the lack of Congressional consent. Id. at 469-71. Consent is not required unless

the compact is subject to the Supremacy Clause.

       The Multistate Tax Compact is an interstate compact protected by the

Contracts Clause, Art. I, § 10, of the United States Constitution. The Contracts

Clause states that “[n]o state shall . . . pass any . . . law impairing the obligation of

contracts.” The Comptroller’s interpretation and application of chapter 171 of the

Tax Code impairs Texas’s contractual obligation to allow taxpayers the three-

factor apportionment formula election under the Multistate Tax Compact. Texas

must abide by the terms of the Multistate Tax Compact and allow taxpayers the

option of apportioning income under the Multistate Tax Compact. Because Texas

is contractually and legally obligated to offer taxpayers the three-factor

apportionment formula election under the Multistate Tax Compact, EMC properly

made that election on its amended franchise tax return.

          Texas did not withdraw from the Multistate Tax Compact.

       The Multistate Tax Compact specifies the only way in which Texas could

withdraw:

       Any party State may withdraw from this compact by enacting a statute
       repealing the same. No withdrawal shall affect any liability already
       incurred by or chargeable to a party State prior to the time of such
       withdrawal.

Tex. Tax Code § 141.001, Art. X.

Appellant’s Brief – Page 14
       No such statute repealing the Multistate Tax Compact was enacted by

the Texas Legislature.

       The Multistate Tax Compact election applies because the Texas
       franchise tax is an income tax.

       The Multistate Tax Compact defines an “income tax” as “a tax imposed on

or measured by net income including any tax imposed on or measured by an

amount arrived at by deducting expenses from gross income, one or more forms of

which expenses are not specifically and directly related to particular transactions.”

Tex. Tax Code § 141.001, Art. II, ¶ 4.

       In 2006, the Texas Legislature enacted the franchise tax and replaced the

earned surplus tax. To determine tax liability under the Texas franchise tax, each

taxpayer multiplies their total revenue less the greater of four deductions ($1

million, cost of goods sold, compensation, or 30% of total revenue) by their Texas

apportionment factor. The Texas apportionment factor is a “fraction, the

numerator of which is the taxable entity’s gross receipts from business done in this

state . . . and the denominator of which is the taxable entity’s gross receipts from

its entire business.” Tex. Tax Code § 171.106(a).

       The Texas franchise tax is an income tax as defined in Article II, ¶ 4,

because, as demonstrated above, its computation allows for the subtraction of

many indirect expenses or overhead—i.e., expenses that are not specifically and



Appellant’s Brief – Page 15
directly related to particular transactions—from gross income reported on the

taxpayer’s federal return.

       Further, “gross receipts tax” is defined by the Multistate Tax Compact as

“[a] tax, other than a sales tax, which is imposed on or measured by the gross

volume of business, in terms of gross receipts or in other terms, and in the

determination of which no deduction is allowed which would constitute the tax an

income tax.” Tex. Tax Code § 141.001, Art. II, ¶ 6.

          The Michigan Supreme Court, in an identical case, held that
          taxpayer was entitled to use the Multistate Tax Compact’s three-
          factor apportionment formula.

       Other jurisdictions provide helpful guidance on this topic. In a 2014 case,

the Michigan Supreme Court examined the issue of whether a taxpayer (IBM)

could elect to use the three-factor apportionment formula under the Multistate Tax

Compact for its taxes or whether it was required to use the sales-factor

apportionment under the Michigan Business Tax Act (“BTA”). Int'l Bus.

Machines Corp. v. Dep't of Treasury, 852 N.W.2d 865, 868 (2014). It found that

IBM was “entitled to use the Compact’s apportionment formula for its 2008

Michigan taxes1 and that the Court of Appeals erred by holding otherwise on the



1
  The IBM court determined that the apportionment formula was applicable to both components
of the taxpayer’s BTA tax base: business income and modified gross receipts. While the latter
was not technically an “income tax” in name, the court held that modified gross receipts fit
within the broad definition of “income tax” under the Compact by taxing a variation of net
income. Id. at 880.


Appellant’s Brief – Page 16
basis of its erroneous conclusion that the Legislature had repealed the Compact’s

election provision by implication when it enacted the BTA.” Id.

       Michigan joined the Multistate Tax Compact in 1970. Id. at 870. In 1976,

the Michigan Legislature replaced a corporate income tax with a single business

tax. Id. “The Legislature, however, did not expressly repeal the Compact.” Id. In

2008, the Michigan Legislature enacted the BTA, which imposed two main taxes:

“the business income tax and the modified gross receipts tax.” Id. In so doing, the

Michigan Legislature expressly repealed the single business tax that had been in

effect since 1976, “but again did not expressly repeal the Compact.” Id. The

Michigan Supreme Court summarized the treatment of the Compact by noting that

“[t]hroughout the evolution of our state’s method of business taxation, the

Compact has remained in effect.” Id. at 871. The Texas Legislature’s treatment of

the Compact has been identical: each time the franchise tax was changed or

amended, the Compact stayed in place in the Tax Code and was not amended.

       The Michigan Supreme Court next examined whether the “Legislature

repealed the Compact’s election provision by implication when it enacted the

BTA.” Id. The Court noted that “repeals by implication are disfavored” and there

is a presumption that if the Legislature intended to repeal a statute, it would have

done so explicitly. Id. Thus, repeal by implication can occur by the enactment of a

subsequent inconsistent act or of an act that occupies the entire field. However,



Appellant’s Brief – Page 17
there must be clear legislative intent. This was not clear legislative intent by the

Michigan Legislature.

       Further, there is a higher level of scrutiny than usual because implicit repeal

is disfavored (plain meaning of one of the provisions is not enough). The BTA

required use of sales-factor for apportionment—this was mandatory. The Court

refused to interpret the requirement in a vacuum because it was not the only tax

law pertaining to income apportionment. Michigan business tax law has always

required use of a particular apportionment formula.

       Finally, statutes must be read in pari materia. The election cannot have

been a dead letter when enacted. Looking at the election as forward-looking—as

contemplating the enactment of a mandatory apportionment formula—is the only

way to give it meaning when enacted.

       The Michigan Legislature expressly repealed inconsistent provisions as the

business taxes changed. In addition, the Legislature retroactively banned use of

the election on May 25, 2011, beginning January 1, 2011. It could have

retroactively repealed the election beginning on an earlier date. The express repeal

indicates there was no implicit repeal earlier. The above-described situation in

Michigan is directly analogous to the issue before this Court.

          The Georgia Tax Tribunal held that the Texas Franchise Tax is an
          income tax.

       Although a Texas court has not yet addressed this issue, at least one other

Appellant’s Brief – Page 18
jurisdiction has construed the Texas franchise as an “income tax,” to which the

Multistate Tax Compact election is applicable. In a November 25, 2014 decision

by the Georgia Tax Tribunal, examining “the plain language of the statute, the

policy underlying its enactment, the applicable rules of statutory construction, and

the substantial weight of judicial, administrative and financial authority both in

Georgia and other jurisdictions,” it held that the “Texas Franchise Tax is indeed a

tax ‘measured on or with respect to income.’” H. Alan Rosenberg v. Douglas J.

Macginnittie, Commissioner, Georgia Department of Revenue, No. 1414626 (GA

Nov. 25, 2014). The Georgia Tax Tribunal concluded:

       [T]he Texas Franchise Tax is a tax based on or measured by “income”
       or “gross income” whether one uses (i) the broad and ordinary
       definition of “income” or (ii) one of the technical definitions of “gross
       income” in conducting the analysis.

       First, the concept of “total revenue” that serves as the initial basis for
       computing the Texas Franchise Tax base is based on or measured by
       “income” or “gross income,” as those terms are broadly defined,
       because “total revenue” is computed by adding up all of the specified
       line items of “income” used in computing a pass-through entity’s
       federal income tax base. . . .

       Alternatively, the Texas Franchise Tax is also based on or measured
       by “income” when focusing on the “taxable margin.” The first option
       for computing the “taxable margin” is simply to take 70 percent of the
       “total revenue” base that is comprised of items form the entity’s
       federal income tax base. See Tex. Tax Code Ann. § 171.101(a)(1).
       Using this method, a taxpayer’s “taxable margin” would still be on or
       measured by “income,” because it is comprised exclusively of the
       items used to compute the taxpayer’s “income” on a federal return,
       before deductions. Alternatively, taxpayers may elect to compute
       their “taxable margin” by deducting the “cost of goods sold” from

Appellant’s Brief – Page 19
       their “total revenue.” See Tex. Tax Code Ann. § 171.101(a)(1). . . .
       [T]his method of computation of the Texas Franchise Tax is also one
       that is on or measured by “income” because [the reporting entity]’s
       tax base beg[ins] with the taxpayer’s “total revenue” – which, as
       described above, is based on “income” or “gross income” – and then
       was further computed using a deduction for “cost of goods sold.” . . .

       The Texas Franchise Tax is thus on or measured by “income,”
       whether the focus is on the “total revenue” base or the “taxable
       margin” base.

Id. at 23-24 (emphasis added).

       The reasoning used by the Georgia Tax Tribunal is apt and should be applied

by this Court. It follows that, because the Texas Franchise Tax is an income tax,

the Multistate Tax Compact election applies and EMC properly sought refunds for

Report Years 2010, 2011, and 2012.

       Disallowing taxpayers an election under the Multistate Tax Compact
       violates the United States and Texas Constitutions.

       Requiring EMC to use the single-factor apportionment formula in

Section 171.006(a) violates the Due Process, Commerce, and Contract Clauses of

the United States Constitution and violates the Equal and Uniform Clause of the

Texas Constitution.

       State apportionment formulas violate the Due Process Clause of the

Fourteenth Amendment of the U.S. Constitution when they attribute to the state “a

percentage of income out of all appropriate proportion to the business transacted

by [a taxpayer] in that state.” Hans Rees’ Sons, Inc. v. North Carolina ex rel.



Appellant’s Brief – Page 20
Maxwell, 283 U.S. 123, 135 (1931). Further, state apportionment formulas that

lead to a “grossly distorted result” violate the Commerce Clause, Art. I, § 8, of the

U.S. Constitution because such formulas burden interstate commerce. Norfolk &

W. Ry. Co. v. Missouri State Tax Comm’n, 390 U.S. 317, 329 (1968).

       The Comptroller’s single-factor apportionment formula, as applied to EMC,

violates both the Due Process and Commerce Clauses because it attributes to Texas

a percentage of income that is disproportionate to the business EMC transacts in

Texas and leads to a grossly distorted result. EMC initially calculated its tax

base—i.e. net income or margin—prior to apportionment by deducting

compensation from total revenue. (CR 716.) EMC apportioned its margin to

Texas using the single-factor apportionment formula in Section 171.106(a). (Id.)

After EMC learned of the Multistate Tax Compact’s three-factor apportionment

formula, it amended its returns for 2010 through 2012 report years. (CR 717.) The

Multistate Tax Compact formula apportions margin based on property, payroll, and

sales factors. Tex. Tax Code § 141.001, Art. IV. EMC elected to apply the

Multistate Tax Compact formula because it apportions income based on the

average ratio of Texas property, payroll, and sales to everywhere property, payroll

and sales. For the 2010 through 2012 report years, EMC’s apportionment factor

using the Multistate Tax Compact formula was less than five percent. (CR 717-

718.) The Texas apportionment formula for the same report years ranged from six



Appellant’s Brief – Page 21
to eight percent. (Id.) The result of applying Texas’ single-factor apportionment

formula nearly doubled EMC’s franchise tax liability and is grossly

disproportionate representation of its business done in Texas.

       EMC was entitled to elect to use the Multistate Tax Compact’s three-factor

apportionment formula in its amended franchise tax returns. Denying EMC the

Multistate Tax Compact election and requiring EMC to use the single-factor

formula is an unconstitutional burden on interstate commerce.

                                    Conclusion

       For the reasons set forth above, EMC respectfully asks this Court to reverse

the district court’s judgment and render judgment that EMC properly elected to

apportion its franchise tax under the Multistate Tax Compact.


                                       Respectfully submitted,


                                        /s/ Doug Sigel
                                       Doug Sigel
                                       Texas Bar No. 18347650
                                       Doug.Sigel@RyanLawLLP.com
                                       Ryan Cotter
                                       Texas Bar No. 24075969
                                       Ryan.Cotter@RyanLawLLP.com
                                       RYAN LAW FIRM, LLP
                                       100 Congress Avenue, Suite 950
                                       Austin, Texas 78701
                                       Telephone: (512) 459-6600
                                       Facsimile: (512) 459-6601

                                       Attorneys for Appellant


Appellant’s Brief – Page 22
                              Certificate of Compliance

       This computer-generated document created in Microsoft Word complies
with the typeface requirements of Tex. R. App. P. 9.4(e) because it has been
prepared in a conventional typeface no smaller than 14-point for text and 12-point
for footnotes. This document also complies with the word-count limitations of
Tex. R. App. P. 9.4(i), if applicable, because it contains 4344 words, excluding any
parts exempted by Tex. R. App. P. 9.4(i)(1). In making this certificate of
compliance, I am relying on the word count provided by the software used to
prepare the document.

                                        /s/ Doug Sigel
                                       Doug Sigel


                                Certificate of Service

       I certify that a copy of the foregoing Appellant’s Brief was served on
Appellees, Glenn Hegar and Ken Paxton, through counsel of record, Rance Craft and
Charles Eldred, Office of the Attorney General, P.O. Box 12548 (MC 59), Austin,
Texas, 78711-2548, rance.craft@texasattorneygeneral.gov,
charles.eldred@texasattorneygeneral.gov, by electronic service through
eFile.TXCourts.gov on April 30, 2015.


                                        /s/ Doug Sigel
                                       Doug Sigel




Appellant’s Brief – Page 23
    Tab 1
Final Judgment
                                DC            BK15051 PG1221




                             Cause No. D-1-GN-14-000851

EMC CORPORATION,                              §         IN THE DISTRICT COURT
                                              §
      Plaintiff,                              §
                                              §
V.                                            §
                                              §         TRAVIS COUNTY, TEXAS
GLENN HEGAR, COMPTROLLER OF                   §
PUBLIC ACCOUNTS OF THE STATE OF               §
TEXAS, AND KEN PAXTON, ATTORNEY               §
GENERAL OF THE STATE OF TEXAS                 §
                                              §         353RD JUDICIAL DISTRICT
      Defendants.                             §


                                     FINAL JUDGMENT

      On February 18, 2015, the cross motions for summary judgment of Plaintiff and

Defendants came on for consideration, and the Court having considered the pleadings,

including the motions, evidence, and argument of counsel, finds that Defendants, Glenn

Hegar, Comptroller of Public Accounts of the State of Texas, and Ken Paxton, Attorney

General of the State of Texas', motion should be granted and that the Plaintiff, EMC

Corporation's motion should be denied.

      All relief requested by the parties and not specifically granted herein is denied.

This judgment finally disposes of all parties and all claims and is appealable.

       Signed this /   ~ay of                         2015.




                                                                                           1172
        Tab 2
Tex. Tax Code § 141.001
    (Vernon 2002)
                       Tax Code § 141.001
            CHAPTER 141. MULTISTATE TAX COMPACT


§ 141.001. Adoption of Multistate Tax Compact

The Multistate Tax Compact is adopted and entered into with all jurisdictions legally
adopting it to read as follows:

                            MULTISTATE TAX COMPACT


                                  ARTICLE I. PURPOSES

The purposes of this compact are to:

1. Facilitate proper determination of state and local tax liability of multistate taxpayers,
including the equitable apportionment of tax bases and settlement of apportionment
disputes.

2. Promote uniformity or compatibility in significant components of tax systems.

3. Facilitate taxpayer convenience and compliance in the filing of tax returns and in other
phases of tax administration.

4. Avoid duplicative taxation.

                                 ARTICLE II. DEFINITIONS

As used in this compact:

1. “State” means a state of the United States, the District of Columbia, the
Commonwealth of Puerto Rico, or any territory or possession of the United States.

2. “Subdivision” means any governmental unit or special district of a state.

3. “Taxpayer” means any corporation, partnership, firm, association, governmental unit
or agency or person acting as a business entity in more than one state.

4. “Income tax” means a tax imposed on or measured by net income including any tax
imposed on or measured by an amount arrived at by deducting expenses from gross
income, one or more forms of which expenses are not specifically and directly related to
particular transactions.

5. “Capital stock tax” means a tax measured in any way by the capital of a corporation
considered in its entirety.

6. “Gross receipts tax” means a tax, other than a sales tax, which is imposed on or
measured by the gross volume of business, in terms of gross receipts or in other terms,
and in the determination of which no deduction is allowed which would constitute the tax
an income tax.

7. “Sales tax” means a tax imposed with respect to the transfer for a consideration of
ownership, possession or custody of tangible personal property or the rendering of
services measured by the price of the tangible personal property transferred or services
rendered and which is required by state or local law to be separately stated from the sales
price by the seller, or which is customarily separately stated from the sales price, but does
not include a tax imposed exclusively on the sale of a specifically identified commodity
or article or class of commodities or articles.

8. “Use tax” means a nonrecurring tax, other than a sales tax, which (a) is imposed on or
with respect to the exercise or enjoyment of any right or power over tangible personal
property incident to the ownership, possession or custody of that property or the leasing
of that property from another including any consumption, keeping, retention, or other use
of tangible personal property and (b) is complementary to a sales tax.

9. “Tax” means an income tax, capital stock tax, gross receipts tax, sales tax, use tax, and
any other tax which has a multistate impact, except that the provisions of Articles III, IV
and V of this compact shall apply only to the taxes specifically designated therein and the
provisions of Article IX of this compact shall apply only in respect to determinations
pursuant to Article IV.

                  ARTICLE III. ELEMENTS OF INCOME TAX LAWS

Taxpayer Option, State and Local Taxes

1. Any taxpayer subject to an income tax whose income is subject to apportionment and
allocation for tax purposes pursuant to the laws of a party state or pursuant to the laws of
subdivisions in two or more party states may elect to apportion and allocate his income in
the manner provided by the laws of such state or by the laws of such states and
subdivisions without reference to this compact, or may elect to apportion and allocate in
accordance with Article IV. This election for any tax year may be made in all party states
or subdivisions thereof or in any one or more of the party states or subdivisions thereof
without reference to the election made in the others. For the purposes of this paragraph,
taxes imposed by subdivisions shall be considered separately from state taxes and the
apportionment and allocation also may be applied to the entire tax base. In no instance
wherein Article IV is employed for all subdivisions of a state may the sum of all
apportionments and allocations to subdivisions within a state be greater than the
apportionment and allocation that would be assignable to that state if the apportionment
or allocation were being made with respect to a state income tax.

Taxpayer Option, Short Form

2. Each party state or any subdivision thereof which imposes an income tax shall provide
by law that any taxpayer required to file a return, whose only activities within the taxing
jurisdiction consist of sales and do not include owning or renting real estate or tangible
personal property, and whose dollar volume of gross sales made during the tax year
within the state or subdivision, as the case may be, is not in excess of $100,000 may elect
to report and pay any tax due on the basis of a percentage of such volume, and shall adopt
rates which shall produce a tax which reasonably approximates the tax otherwise due.
The Multistate Tax Commission, not more than once in five years, may adjust the
$100,000 figure in order to reflect such changes as may occur in the real value of the
dollar, and such adjusted figure, upon adoption by the commission, shall replace the
$100,000 figure specifically provided herein. Each party state and subdivision thereof
may make the same election available to taxpayers additional to those specified in this
paragraph.

Coverage

3. Nothing in this article relates to the reporting or payment of any tax other than an
income tax.

                         ARTICLE IV. DIVISION OF INCOME

1. As used in this article, unless the context otherwise requires:

(a) “Business income” means income arising from transactions and activity in the
regular course of the taxpayer’s trade or business and includes income from tangible and
intangible property if the acquisition, management, and disposition of the property
constitute integral parts of the taxpayer’s regular trade or business operations.

(b) “Commercial domicile” means the principal place from which the trade or business
of the taxpayer is directed or managed.

(c) “Compensation” means wages, salaries, commissions and any other form of
remuneration paid to employees for personal services.

(d) “Financial organization” means any bank, trust company, savings bank, industrial
bank, land bank, safe deposit company, private banker, savings and loan association,
credit union, cooperative bank, small loan company, sales finance company, investment
company, or any type of insurance company.
(e) “Nonbusiness income” means all income other than business income.

(f) “Public utility” means any business entity (1) which owns or operates any plant,
equipment, property, franchise, or license for the transmission of communications,
transportation of goods or persons, except by pipe line, or the production, transmission,
sale, delivery, or furnishing of electricity, water or steam; and (2) whose rates of charges
for goods or services have been established or approved by a federal, state or local
government or governmental agency.

(g) “Sales” means all gross receipts of the taxpayer not allocated under paragraphs of
this article.

(h) “State” means any state of the United States, the District of Columbia, the
Commonwealth of Puerto Rico, any territory or possession of the United States, and any
foreign country or political subdivision thereof.

(i) “This state” means the state in which the relevant tax return is filed or, in the case of
application of this article to the apportionment and allocation of income for local tax
purposes, the subdivision or local taxing district in which the relevant tax return is filed.

2. Any taxpayer having income from business activity which is taxable both within and
without this state, other than activity as a financial organization or public utility or the
rendering of purely personal services by an individual, shall allocate and apportion his net
income as provided in this article. If a taxpayer has income from business activity as a
public utility but derives the greater percentage of his income from activities subject to
this article, the taxpayer may elect to allocate and apportion his entire net income as
provided in this article.

3. For purposes of allocation and apportionment of income under this article, a taxpayer
is taxable in another state if (1) in that state he is subject to a net income tax, a franchise
tax measured by net income, a franchise tax for the privilege of doing business, or a
corporate stock tax, or (2) that state has jurisdiction to subject the taxpayer to a net
income tax regardless of whether, in fact, the state does or does not.

4. Rents and royalties from real or tangible personal property, capital gains, interest,
dividends or patent or copyright royalties, to the extent that they constitute nonbusiness
income, shall be allocated as provided in paragraphs 5 through 8 of this article.

5. (a) Net rents and royalties from real property located in this state are allocable to this
state.

(b) Net rents and royalties from tangible personal property are allocable to this state: (1)
if and to the extent that the property is utilized in this state, or (2) in their entirety if the
taxpayer’s commercial domicile is in this state and the taxpayer is not organized under
the laws of or taxable in the state in which the property is utilized.

(c) The extent of utilization of tangible personal property in a state is determined by
multiplying the rents and royalties by a fraction, the numerator of which is the number of
days of physical location of the property in the state during the rental or royalty period in
the taxable year and the denominator of which is the number of days of physical location
of the property everywhere during all rental or royalty periods in the taxable year. If the
physical location of the property during the rental or royalty period is unknown or
unascertainable by the taxpayer, tangible personal property is utilized in the state in
which the property was located at the time the rental or royalty payer obtained
possession.

6. (a) Capital gains and losses from sales of real property located in this state are
allocable to this state.

(b) Capital gains and losses from sales of tangible personal property are allocable to this
state if (1) the property had a situs in this state at the time of the sale, or (2) the
taxpayer’s commercial domicile is in this state and the taxpayer is not taxable in the state
in which the property had a situs.

(c) Capital gains and losses from sales of intangible personal property are allocable to
this state if the taxpayer’s commercial domicile is in this state.

7. Interest and dividends are allocable to this state if the taxpayer’s commercial domicile
is in this state.

8. (a) Patent and copyright royalties are allocable to this state: (1) if and to the extent that
the patent or copyright is utilized by the payer in this state, or (2) if and to the extent that
the patent or copyright is utilized by the payer in a state in which the taxpayer is not
taxable and the taxpayer’s commercial domicile is in this state.

(b) A patent is utilized in a state to the extent that it is employed in production,
fabrication, manufacturing, or other processing in the state or to the extent that a
patented product is produced in the state. If the basis of receipts from patent royalties
does not permit allocation to states or if the accounting procedures do not reflect states
of utilization, the patent is utilized in the state in which the taxpayer’s commercial
domicile is located.

(c) A copyright is utilized in a state to the extent that printing or other publication
originates in the state. If the basis of receipts from copyright royalties does not permit
allocation to states or if the accounting procedures do not reflect states of utilization, the
copyright is utilized in the state in which the taxpayer’s commercial domicile is located.

9. All business income shall be apportioned to this state by multiplying the income by a
fraction, the numerator of which is the property factor plus the payroll factor plus the
sales factor, and the denominator of which is three.

10. The property factor is a fraction, the numerator of which is the average value of the
taxpayer’s real and tangible personal property owned or rented and used in this state
during the tax period and the denominator of which is the average value of all the
taxpayer’s real and tangible personal property owned or rented and used during the tax
period.

11. Property owned by the taxpayer is valued at its original cost. Property rented by the
taxpayer is valued at eight times the net annual rental rate. Net annual rental rate is the
annual rental rate paid by the taxpayer less any annual rental rate received by the
taxpayer from subrentals.

12. The average value of property shall be determined by averaging the values at the
beginning and ending of the tax period but the tax administrator may require the
averaging of monthly values during the tax period if reasonably required to reflect
properly the average value of the taxpayer’s property.

13. The payroll factor is a fraction, the numerator of which is the total amount paid in this
state during the tax period by the taxpayer for compensation and the denominator of
which is the total compensation paid everywhere during the tax period.

14. Compensation is paid in this state if:

(a) the individual’s service is performed entirely within the state;

(b) the individual’s service is performed both within and without the state, but the
service performed without the state is incidental to the individual’s service within the
state; or

(c) some of the service is performed in the state and (1) the base of operations or, if there
is no base of operations, the place from which the service is directed or controlled is in
the state, or (2) the base of operations or the place from which the service is directed or
controlled is not in any state in which some part of the service is performed, but the
individual’s residence is in this state.

15. The sales factor is a fraction, the numerator of which is the total sales of the taxpayer
in this state during the tax period, and the denominator of which is the total sales of the
taxpayer everywhere during the tax period.

16. Sales of tangible personal property are in this state if:

(a) the property is delivered or shipped to a purchaser, other than the United States
government, within this state regardless of the f. o. b. point or other conditions of the
sale; or

(b) the property is shipped from an office, store, warehouse, factory, or other place of
storage in this state and (1) the purchaser is the United States government or (2) the
taxpayer is not taxable in the state of the purchaser.

17. Sales, other than sales of tangible personal property, are in this state if:

(a) the income-producing activity is performed in this state; or

(b) the income-producing activity is performed both in and outside this state and a
greater proportion of the income-producing activity is performed in this state than in any
other state, based on costs of performance.

18. If the allocation and apportionment provisions of this article do not fairly represent
the extent of the taxpayer’s business activity in this state, the taxpayer may petition for or
the tax administrator may require, in respect to all or any part of the taxpayer’s business
activity, if reasonable:

(a) separate accounting;

(b) the exclusion of any one or more of the factors;

(c) the inclusion of one or more additional factors which will fairly represent the
taxpayer’s business activity in this state; or

(d) the employment of any other method to effectuate an equitable allocation and
apportionment of the taxpayer’s income.

             ARTICLE V. ELEMENTS OF SALES AND USE TAX LAWS


                                          Tax Credit

1. Each purchaser liable for a use tax on tangible personal property shall be entitled to
full credit for the combined amount or amounts of legally imposed sales or use taxes paid
by him with respect to the same property to another state and any subdivision thereof.
The credit shall be applied first against the amount of any use tax due the state, and any
unused portion of the credit shall then be applied against the amount of any use tax due a
subdivision.

Exemption Certificates, Vendors May Rely

2. Whenever a vendor receives and accepts in good faith from a purchaser a resale or
other exemption certificate or other written evidence of exemption authorized by the
appropriate state or subdivision taxing authority, the vendor shall be relieved of liability
for a sales or use tax with respect to the transaction.

                           ARTICLE VI. THE COMMISSION


                              Organization and Management

1. (a) The Multistate Tax Commission is hereby established. It shall be composed of one
“member” from each party state who shall be the head of the state agency charged with
the administration of the types of taxes to which this compact applies. If there is more
than one such agency the state shall provide by law for the selection of the commission
member from the heads of the relevant agencies. State law may provide that a member of
the commission be represented by an alternate but only if there is on file with the
commission written notification of the designation and identity of the alternate. The
attorney general of each party state or his designee, or other counsel if the laws of the
party state specifically provide, shall be entitled to attend the meetings of the
commission, but shall not vote. Such attorneys general, designees, or other counsel shall
receive all notices of meetings required under paragraph 1(e) of this article.

(b) Each party state shall provide by law for the selection of representatives from its
subdivisions affected by this compact to consult with the commission member from that
state.

(c) Each member shall be entitled to one vote. The commission shall not act unless a
majority of the members are present, and no action shall be binding unless approved by a
majority of the total number of members.

(d) The commission shall adopt an official seal to be used as it may provide.

(e) The commission shall hold an annual meeting and such other regular meetings as its
bylaws may provide and such special meetings as its executive committee may
determine. The commission bylaws shall specify the dates of the annual and any other
regular meetings, and shall provide for the giving of notice of annual, regular and special
meetings. Notices of special meetings shall include the reasons therefor and an agenda of
the items to be considered.

(f) The commission shall elect annually, from among its members, a chairman, a
vice-chairman and a treasurer. The commission shall appoint an executive director who
shall serve at its pleasure, and it shall fix his duties and compensation. The executive
director shall be secretary of the commission. The commission shall make provision for
the bonding of such of its officers and employees as it may deem appropriate.

(g) Irrespective of the civil service, personnel or other merit system laws of any party
state, the executive director shall appoint or discharge such personnel as may be
necessary for the performance of the functions of the commission and shall fix their
duties and compensation. The commission bylaws shall provide for personnel policies
and programs.

(h) The commission may borrow, accept or contract for the services of personnel from
any state, the United States, or any other governmental entity.

(i) The commission may accept for any of its purposes and functions any and all
donations and grants of money, equipment, supplies, materials and services, conditional
or otherwise, from any governmental entity, and may utilize and dispose of the same.

(j) The commission may establish one or more offices for the transacting of its business.

(k) The commission shall adopt bylaws for the conduct of its business. The commission
shall publish its bylaws in convenient form, and shall file a copy of the bylaws and any
amendments thereto with the appropriate agency or officer in each of the party states.

(l) The commission annually shall make to the governor and legislature of each party
state a report covering its activities for the preceding year. Any donation or grant
accepted by the commission or services borrowed shall be reported in the annual report
of the commission, and shall include the nature, amount and conditions, if any, of the
donation, gift, grant or services borrowed and the identity of the donor or lender. The
commission may make additional reports as it may deem desirable.

Committees

2. (a) To assist in the conduct of its business when the full commission is not meeting, the
commission shall have an executive committee of seven members, including the
chairman, vice-chairman, treasurer and four other members elected annually by the
commission. The executive committee, subject to the provisions of this compact and
consistent with the policies of the commission, shall function as provided in the bylaws
of the commission.

(b) The commission may establish advisory and technical committees, membership on
which may include private persons and public officials, in furthering any of its activities.
Such committees may consider any matter of concern to the commission, including
problems of special interest to any party state and problems dealing with particular types
of taxes.

(c) The commission may establish such additional committees as its bylaws may
provide.
Powers

3. In addition to powers conferred elsewhere in this compact, the commission shall have
power to:

(a) Study state and local tax systems and particular types of state and local taxes.

(b) Develop and recommend proposals for an increase in uniformity or compatibility of
state and local tax laws with a view toward encouraging the simplification and
improvement of state and local tax law and administration.

(c) Compile and publish information as in its judgment would assist the party states in
implementation of the compact and taxpayers in complying with state and local tax laws.

(d) Do all things necessary and incidental to the administration of its functions pursuant
to this compact.

Finance

4. (a) The commission shall submit to the governor or designated officer or officers of
each party state a budget of its estimated expenditures for such period as may be required
by the laws of that state for presentation to the legislature thereof.

(b) Each of the commission’s budgets of estimated expenditures shall contain specific
recommendations of the amounts to be appropriated by each of the party states. The total
amount of appropriations requested under any such budget shall be apportioned among
the party states as follows: one-tenth in equal shares; and the remainder in proportion to
the amount of revenue collected by each party state and its subdivisions from income
taxes, capital stock taxes, gross receipts taxes, sales and use taxes. In determining such
amounts, the commission shall employ such available public sources of information as,
in its judgment, present the most equitable and accurate comparisons among the party
states. Each of the commission’s budgets of estimated expenditures and requests for
appropriations shall indicate the sources used in obtaining information employed in
applying the formula contained in this paragraph.

(c) The commission shall not pledge the credit of any party state. The commission may
meet any of its obligations in whole or in part with funds available to it under paragraph
1(i) of this article: provided that the commission takes specific action setting aside such
funds prior to incurring any obligation to be met in whole or in part in such manner.
Except where the commission makes use of funds available to it under paragraph 1(i),
the commission shall not incur any obligation prior to the allotment of funds by the party
states adequate to meet the same.

(d) The commission shall keep accurate accounts of all receipts and disbursements. The
receipts and disbursements of the commission shall be subject to the audit and
accounting procedures established under its bylaws. All receipts and disbursements of
funds handled by the commission shall be audited yearly by a certified or licensed public
accountant and the report of the audit shall be included in and become part of the annual
report of the commission.

(e) The accounts of the commission shall be open at any reasonable time for inspection
by duly constituted officers of the party states and by any persons authorized by the
commission.

(f) Nothing contained in this article shall be construed to prevent commission
compliance with laws relating to audit or inspection of accounts by or on behalf of any
government contributing to the support of the commission.

               ARTICLE VII. UNIFORM REGULATIONS AND FORMS

1. Whenever any two or more party states, or subdivisions of party states, have uniform
or similar provisions of law relating to an income tax, capital stock tax, gross receipts tax,
sales or use tax, the commission may adopt uniform regulations for any phase of the
administration of such law, including assertion of jurisdiction to tax, or prescribing
uniform tax forms. The commission may also act with respect to the provisions of Article
IV of this compact.

2. Prior to the adoption of any regulation, the commission shall:

(a) As provided in its bylaws, hold at least one public hearing on due notice to all
affected party states and subdivisions thereof and to all taxpayers and other persons who
have made timely request of the commission for advance notice of its regulation-making
proceedings.

(b) Afford all affected party states and subdivisions and interested persons an
opportunity to submit relevant written data and views, which shall be considered fully by
the commission.

3. The commission shall submit any regulations adopted by it to the appropriate officials
of all party states and subdivisions to which they might apply. Each such state and
subdivision shall consider any such regulation for adoption in accordance with its own
laws and procedures.

                         ARTICLE VIII. INTERSTATE AUDITS

1. This article shall be in force only in those party states that specifically provide therefor
by statute.
2. Any party state or subdivision thereof desiring to make or participate in an audit of any
accounts, books, papers, records or other documents may request the commission to
perform the audit on its behalf. In responding to the request, the commission shall have
access to and may examine, at any reasonable time, such accounts, books, papers,
records, and other documents and any relevant property or stock of merchandise. The
commission may enter into agreements with party states or their subdivisions for
assistance in performance of the audit. The commission shall make charges, to be paid by
the state or local government or governments for which it performs the service, for any
audits performed by it in order to reimburse itself for the actual costs incurred in making
the audit.

3. The commission may require the attendance of any person within the state where it is
conducting an audit or part thereof at a time and place fixed by it within such state for the
purpose of giving testimony with respect to any account, book, paper, document, other
record, property or stock of merchandise being examined in connection with the audit. If
the person is not within the jurisdiction, he may be required to attend for such purpose at
any time and place fixed by the commission within the state of which he is a resident:
provided that such state has adopted this article.

4. The commission may apply to any court having power to issue compulsory process for
orders in aid of its powers and responsibilities pursuant to this article and any and all such
courts shall have jurisdiction to issue such orders. Failure of any person to obey any such
order shall be punishable as contempt of the issuing court. If the party or subject matter
on account of which the commission seeks an order is within the jurisdiction of the court
to which application is made, such application may be to a court in the state or
subdivision on behalf of which the audit is being made or a court in the state in which the
object of the order being sought is situated. The provisions of this paragraph apply only
to courts in a state that has adopted this article.

5. The commission may decline to perform any audit requested if it finds that its available
personnel or other resources are insufficient for the purpose or that, in the terms
requested, the audit is impracticable of satisfactory performance. If the commission, on
the basis of its experience, has reason to believe that an audit of a particular taxpayer,
either at a particular time or on a particular schedule, would be of interest to a number of
party states or their subdivisions, it may offer to make the audit or audits, the offer to be
contingent on sufficient participation therein as determined by the commission.

6. Information obtained by any audit pursuant to this article shall be confidential and
available only for tax purposes to party states, their subdivisions or the United States.
Availability of information shall be in accordance with the laws of the states or
subdivisions on whose account the commission performs the audit, and only through the
appropriate agencies or officers of such states or subdivisions. Nothing in this article shall
be construed to require any taxpayer to keep records for any period not otherwise
required by law.

7. Other arrangements made or authorized pursuant to law for cooperative audit by or on
behalf of the party states or any of their subdivisions are not superseded or invalidated by
this article.

8. In no event shall the commission make any charge against a taxpayer for an audit.

9. As used in this article, “tax,” in addition to the meaning ascribed to it in Article II,
means any tax or license fee imposed in whole or in part for revenue purposes.

                             ARTICLE IX. ARBITRATION

1. Whenever the commission finds a need for settling disputes concerning
apportionments and allocations by arbitration, it may adopt a regulation placing this
article in effect, notwithstanding the provisions of Article VII.

2. The commission shall select and maintain an arbitration panel composed of officers
and employees of state and local governments and private persons who shall be
knowledgeable and experienced in matters of tax law and administration.

3. Whenever a taxpayer who has elected to employ Article IV, or whenever the laws of
the party state or subdivision thereof are substantially identical with the relevant
provisions of Article IV, the taxpayer, by written notice to the commission and to each
party state or subdivision thereof that would be affected, may secure arbitration of an
apportionment or allocation, if he is dissatisfied with the final administrative
determination of the tax agency of the state or subdivision with respect thereto on the
ground that it would subject him to double or multiple taxation by two or more party
states or subdivisions thereof. Each party state and subdivision thereof hereby consents to
the arbitration as provided herein, and agrees to be bound thereby.

4. The arbitration board shall be composed of one person selected by the taxpayer, one by
the agency or agencies involved, and one member of the commission’s arbitration panel.
If the agencies involved are unable to agree on the person to be selected by them, such
person shall be selected by lot from the total membership of the arbitration panel. The
two persons selected for the board in the manner provided by the foregoing provisions of
this paragraph shall jointly select the third member of the board. If they are unable to
agree on the selection, the third member shall be selected by lot from among the total
membership of the arbitration panel. No member of a board selected by lot shall be
qualified to serve if he is an officer or employee or is otherwise affiliated with any party
to the arbitration proceeding. Residence within the jurisdiction of a party to the
arbitration proceeding shall not constitute affiliation within the meaning of this
paragraph.
5. The board may sit in any state or subdivision party to the proceeding, in the state of the
taxpayer’s incorporation, residence or domicile, in any state where the taxpayer does
business, or in any place that it finds most appropriate for gaining access to evidence
relevant to the matter before it.

6. The board shall give due notice of the times and places of its hearings. The parties
shall be entitled to be heard, to present evidence, and to examine and cross-examine
witnesses. The board shall act by majority vote.

7. The board shall have power to administer oaths, take testimony, subpoena and require
the attendance of witnesses and the production of accounts, books, papers, records, and
other documents, and issue commissions to take testimony. Subpoenas may be signed by
any member of the board. In case of failure to obey a subpoena, and upon application by
the board, any judge of a court of competent jurisdiction of the state in which the board is
sitting or in which the person to whom the subpoena is directed may be found may make
an order requiring compliance with the subpoena, and the court may punish failure to
obey the order as a contempt. The provisions of this paragraph apply only in states that
have adopted this article.

8. Unless the parties otherwise agree the expenses and other costs of the arbitration shall
be assessed and allocated among the parties by the board in such manner as it may
determine. The commission shall fix a schedule of compensation for members of
arbitration boards and of other allowable expenses and costs. No officer or employee of a
state or local government who serves as a member of a board shall be entitled to
compensation therefor unless he is required on account of his service to forego the
regular compensation attaching to his public employment, but any such board member
shall be entitled to expenses.

9. The board shall determine the disputed apportionment or allocation and any matters
necessary thereto. The determinations of the board shall be final for purposes of making
the apportionment or allocation, but for no other purpose.

10. The board shall file with the commission and with each tax agency represented in the
proceeding: the determination of the board; the board’s written statement of its reasons
therefor; the record of the board’s proceedings; and any other documents required by the
arbitration rules of the commission to be filed.

11. The commission shall publish the determinations of boards together with the
statements of the reasons therefor.

12. The commission shall adopt and publish rules of procedure and practice and shall file
a copy of such rules and of any amendment thereto with the appropriate agency or officer
in each of the party states.
13. Nothing contained herein shall prevent at any time a written compromise of any
matter or matters in dispute, if otherwise lawful, by the parties to the arbitration
proceeding.

              ARTICLE X. ENTRY INTO FORCE AND WITHDRAWAL

1. This compact shall enter into force when enacted into law by any seven states.
Thereafter, this compact shall become effective as to any other state upon its enactment
thereof. The commission shall arrange for notification of all party states whenever there
is a new enactment of the compact.

2. Any party state may withdraw from this compact by enacting a statute repealing the
same. No withdrawal shall affect any liability already incurred by or chargeable to a party
state prior to the time of such withdrawal.

3. No proceeding commenced before an arbitration board prior to the withdrawal of a
state and to which the withdrawing state or any subdivision thereof is a party shall be
discontinued or terminated by the withdrawal, nor shall the board thereby lose
jurisdiction over any of the parties to the proceeding necessary to make a binding
determination therein.

           ARTICLE XI. EFFECT ON OTHER LAWS AND JURISDICTION

Nothing in this compact shall be construed to:

(a) Affect the power of any state or subdivision thereof to fix rates of taxation, except that
a party state shall be obligated to implement Article III 2 of this compact.

(b) Apply to any tax or fixed fee imposed for the registration of a motor vehicle or any
tax on motor fuel, other than a sales tax; provided that the definition of “tax” in Article
VIII 9 may apply for the purposes of that article and the commission’s powers of study
and recommendation pursuant to Article VI 3 may apply.

(c) Withdraw or limit the jurisdiction of any state or local court or administrative officer
or body with respect to any person, corporation or other entity or subject matter, except to
the extent that such jurisdiction is expressly conferred by or pursuant to this compact
upon another agency or body.

(d) Supersede or limit the jurisdiction of any court of the United States.
               ARTICLE XII. CONSTRUCTION AND SEVERABILITY

This compact shall be liberally construed so as to effectuate the purposes thereof. The
provisions of this compact shall be severable and if any phrase, clause, sentence or
provision of this compact is declared to be contrary to the constitution of any state or of
the United States or the applicability thereof to any government, agency, person or
circumstance is held invalid, the validity of the remainder of this compact and the
applicability thereof to any government, agency, person or circumstance shall not be
affected thereby. If this compact shall be held contrary to the constitution of any state
participating therein, the compact shall remain in full force and effect as to the remaining
party states and in full force and effect as to the state affected as to all severable matters.
        Tab 3
Tex. Tax Code § 171.106
    (Vernon 2002)
                            Tax Code § 171.106
                      CHAPTER 171. FRANCHISE TAX

 § 171.106. Apportionment of Taxable Capital and Taxable Earned Surplus to This State

(a) Except as provided by Subsections (c) and (d), a corporation’s taxable capital is
apportioned to this state to determine the amount of the tax imposed under Section
171.002(b)(1) by multiplying the corporation’s taxable capital by a fraction, the
numerator of which is the corporation’s gross receipts from business done in this state, as
determined under Section 171.103, and the denominator of which is the corporation’s
gross receipts from its entire business, as determined under Section 171.105.

(b) Except as provided by Subsections (c) and (d), a corporation’s taxable earned surplus
is apportioned to this state to determine the amount of tax imposed under Section
171.002(b)(2) by multiplying the taxable earned surplus by a fraction, the numerator of
which is the corporation’s gross receipts from business done in this state, as determined
under Section 171.1032, and the denominator of which is the corporation’s gross receipts
from its entire business, as determined under Section 171.1051.

(c) A corporation’s taxable capital or earned surplus that is derived, directly or indirectly,
from the sale of management, distribution, or administration services to or on behalf of a
regulated investment company, including a corporation that includes trustees or sponsors
of employee benefit plans that have accounts in a regulated investment company, is
apportioned to this state to determine the amount of the tax imposed under Section
171.002 by multiplying the corporation’s total taxable capital or earned surplus from the
sale of services to or on behalf of a regulated investment company by a fraction, the
numerator of which is the average of the sum of shares owned at the beginning of the
year and the sum of shares owned at the end of the year by the investment company
shareholders who are commercially domiciled in this state or, if the shareholders are
individuals, are residents of this state, and the denominator of which is the average of the
sum of shares owned at the beginning of the year and the sum of shares owned at the end
of the year by all investment company shareholders. The corporation shall make a
separate computation to allocate taxable capital and earned surplus. In this subsection,
“regulated investment company” has the meaning assigned by Section 851(a), Internal
Revenue Code.

(d) A corporation’s taxable capital or taxable earned surplus that is derived, directly or
indirectly, from the sale of management, administration, or investment services to an
employee retirement plan is apportioned to this state to determine the amount of the tax
imposed under Section 171.002 by multiplying the corporation’s total taxable capital or
earned surplus from the sale of services to an employee retirement plan company by a
fraction, the numerator of which is the average of the sum of beneficiaries domiciled in
Texas at the beginning of the year and the sum of beneficiaries domiciled in Texas at the
end of the year, and the denominator of which is the average of the sum of all
beneficiaries at the beginning of the year and the sum of all beneficiaries at the end of the
year. The corporation shall make a separate computation to apportion taxable capital and
earned surplus. In this section, “employee retirement plan” means a plan or other
arrangement that is qualified under Section 401(a), Internal Revenue Code, or satisfies
the requirements of Section 403, Internal Revenue Code, or a government plan described
in Section 414(d), Internal Revenue Code. The term does not include an individual
retirement account or individual retirement annuity within the meaning of Section 408,
Internal Revenue Code.

(e) On or before January 1, 1998, each entity registered with the State Securities Board
under The Securities Act (Article 581, Vernon’s Texas Civil Statutes) that provides
management, administration, or investment services to an employee retirement plan, must
file a report with the comptroller containing such information as the comptroller deems
necessary in order to determine the fiscal impact of Subsection (d). The State Securities
Board and the Securities Commissioner shall cooperate with the comptroller in obtaining
the information. The Securities Commissioner shall impose the penalties provided in The
Securities Act (Article 581-1 et seq., Vernon’s Texas Civil Statutes) against any entity
that the comptroller certifies is delinquent in the filing of the report required by this
section.

(f) On or before September 1, 1998, the comptroller shall issue a report which evaluates
the statewide fiscal impact of Subsection (d). If the comptroller determines that
implementing Subsection (d) will not have a negative fiscal impact on this state,
Subsection (d) shall be effective for reports or returns originally due on or after January
1, 1999. If the comptroller determines that there will be a negative fiscal impact, that
subsection shall not be implemented.

(g) If this Act and another Act of the 75th Legislature, Regular Session, 1997, make the
same substantive change from the current law but differ in text, this Act prevails
regardless of the relative dates of enactment.

(h) A banking corporation shall exclude from the numerator of the bank’s apportionment
factor interest earned on federal funds and interest earned on securities sold under an
agreement to repurchase that are held in this state in a correspondent bank that is
domiciled in this state. In this subsection, “correspondent” has the meaning assigned by
12 C.F.R. Section 206.2(c).
        Tab 4
Tex. Tax Code § 112.151
    (Vernon 2002)
                          Tax Code § 112.151
                   CHAPTER 112. TAXPAYERS’ SUITS

 § 112.151. Suit for Refund

(a) A person may sue the comptroller to recover an amount of tax, penalty, or interest that
has been the subject of a tax refund claim if the person has:

(1) filed a tax refund claim under Section 111.104 of this code;

(2) filed, as provided by Section 111.105 of this code, a motion for rehearing that has
been denied by the comptroller; and

(3) paid any additional tax found due in a jeopardy or deficiency determination that
applies to the tax liability period covered in the tax refund claim.

(b) The suit must be brought against both the comptroller and the attorney general and
must be filed in a district court.

(c) The suit must be filed before the expiration of 30 days after the issue date of the
denial of the motion for rehearing or it is barred.

(d) The amount of the refund sought must be set out in the original petition. A copy of the
motion for rehearing filed under Section 111.105 of this code must be attached to the
original petition filed with the court and to the copies of the original petition served on
the comptroller and the attorney general.

(e) A person may not intervene in the suit.

(f) Repealed by Acts 1997, 75th Leg., ch. 1423, § 19.128, eff. Sept. 1, 1997.
        Tab 5
Tex. Const. art. I, §16
                              Texas Const. Art. 1, § 16

Sec. 16. No bill of attainder, ex post facto law, retroactive law, or any law impairing the
obligation of contracts, shall be made.
        Tab 6
U.S. Const. art. I, § 10
                         U.S.C.A. Const. Art. I § 10, cl. 1

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque
and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin
a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law
impairing the Obligation of Contracts, or grant any Title of Nobility
               Tab 7
Int'l Bus. Machines Corp. v. Dep't of
 Treasury, 852 N.W.2d 865 (2014)
             496 Mich. 642                   calculate using Compact’s three-factor
       Supreme Court of Michigan.            apportionment test.

       INTERNATIONAL BUSINESS
           MACHINES CORP.                    Judgment of the Court of Appeals
                 v.                          reversed; remanded to Court of Claims.
      DEPARTMENT OF TREASURY.
                                             Zahra, J., filed concurring opinion.
  Docket No. 146440. | July 14, 2014.
                                             McCormack, J., filed dissenting opinion
                                             in which Young, C.J., and Kelly, J.,
                                             concurred.
Synopsis
Background: Corporate taxpayer that
did business in multiple states filed        Attorneys and Law Firms
complaint challenging decision of
Department of Treasury rejected              **867 Miller, Canfield, Paddock and
taxpayer’s election of three-factor          Stone, PLC, Lansing (by Clifford W.
apportionment formula under Multistate       Taylor and Gregory A. Nowak), and
Tax Compact for calculating business         Silverstein & Pomerantz LLP (by Amy
income and requiring taxpayer to             L. Silverstein, Edwin P. Antolin, and
apportion its income using sales-factor      Johanna W. Roberts, pro hac vice) for
formula under Business Tax Act (BTA).        IBM Corporation.
The     Court    of  Claims     granted
Department’s motion for summary              Bill Schuette, Attorney General, Aaron
disposition based on determination that      D. Lindstrom, Solicitor General, and
BTA repealed Compact by implication.         Michael R. Bell, Assistant Attorney
Taxpayer appealed, and the Court of          General, for the Department of Treasury.
Appeals, 2012 WL 6913772, affirmed.
Taxpayer’s application for leave to          **868 Honigman Miller Schwartz and
appeal was granted.                          Cohn LLP, Detroit (by Lynn A. Gandhi)
                                             for the Council on State Taxation.

                                             Honigman Miller Schwartz and Cohn
Holdings: The Supreme Court, Viviano,        LLP, Detroit (by Lynn A. Gandhi) and
J., held that:                               Morrison & Foerster LLP (by Craig B.
                                             Fields and Mitchell A. Newark, pro hac
[1]                                          vice) for Lorillard Tobacco Company.
  enactment of BTA did not repeal
Compact by implication, and
                                             Joe Huddleston, Shirley K. Sicilian, and
[2]
   modified gross receipts tax fell within   Sheldon H. Laskin, pro hac vice, for the
scope of Compact’s definition of             Multistate Tax Commission.
“income tax” that taxpayer could
                                             Jeffrey B. Litwak, pro hac vice.
Richard L. Masters, pro hac vice, for the
Interstate Commission for Juveniles and       Accordingly, we reverse the Court of
the      Association     of      Compact      Appeals judgment in favor of the
Administrators of the Interstate Compact      Department, reverse the Court of Claims
on the Placement of Children.                 order granting summary disposition in
                                              favor of the Department, and remand to
BEFORE THE ENTIRE BENCH.                      the Court of Claims for entry of an order
                                              granting summary disposition in favor of
Opinion                                       IBM.
VIVIANO, J.


*644 In this case, we must determine             I. FACTS AND PROCEEDINGS
whether plaintiff International Business
Machines Corporation (IBM) could elect        IBM is a corporation based in New York
to use the three-factor apportionment         that provides information technology
*645 formula under the Multistate Tax         products and services worldwide. In
Compact1 (the Compact) for its 2008           December 2009, IBM filed its Michigan
Michigan taxes, or whether it was             Business Tax annual return for the 2008
required to use the sales-factor              tax year. Line 10 of IBM’s return, the
apportionment formula under the               “Apportionment Calculation” line, read
Michigan Business Tax Act (BTA).2 The         “SEE ATTACHED ELECTION.” IBM
Department       of    Treasury     (the      filed a separate *646 statement along
Department) rejected IBM’s attempt to         with its return, entitled “Election to use
use the Compact’s apportionment               MTC Three Factor Apportionment,”
formula and, instead, required IBM to         indicating that it elected to apportion its
apportion its income using the BTA’s          business income tax base and modified
sales-factor formula.                         gross receipts tax base using the
                                              three-factor    apportionment      formula
We conclude that IBM was entitled to          provided in the Compact. Under these
use     the     Compact’s      three-factor   calculations, IBM sought a refund of
apportionment formula for its 2008            $5,955,218. The Department disagreed.
Michigan taxes and that the Court of          It determined that IBM could not elect to
Appeals erred by holding otherwise on         use the Compact’s formula and that IBM
the basis of its erroneous conclusion that    was entitled to a refund of only
the Legislature had repealed the              $1,253,609 when calculated under the
Compact’s election provision by               BTA’s       sales-factor    apportionment
implication when it enacted the BTA. We       formula.
further hold that IBM could use the
Compact’s apportionment formula for           IBM filed a complaint in the Court of
that portion of its tax base subject to the   Claims, challenging the Department’s
modified gross receipts tax of the BTA.       decision. Thereafter, IBM moved for
summary disposition under MCR                            apportionment formula
2.116(C)(10), and the Department moved                   provided        in     the
for summary disposition under MCR                        Multistate Tax Compact,
2.116(I)(2). After a hearing on the                      MCL         205.581,    in
motions, the Court of **869 Claims                       calculating its 2008 tax
denied summary disposition to IBM and                    liability to the State of
granted summary disposition in favor of                  Michigan, or whether it
the Department. The Court of Claims                      was required to use the
determined that the BTA mandated the                     apportionment formula
use of the sales-factor apportionment                    provided        in     the
formula.                                                 Michigan Business Tax
                                                         Act, MCL 208.1101 et
In an unpublished opinion, the Court of                  seq.; (2) whether § 301
Appeals affirmed the Court of Claims                     of       the     Michigan
order granting summary disposition in                    Business Tax Act, MCL
favor of the Department.3 The Court of                   208.1301, repealed by
Appeals first determined that there was a                implication Article III(1)
facial conflict between the BTA and the                  of the Multistate Tax
Compact insofar as the BTA mandates                      Compact; (3) whether
use of the sales-factor formula while the                the     Multistate    Tax
Compact permits taxpayers to elect to                    Compact constitutes a
use a three-factor apportionment                         contract that cannot be
formula.4 On the basis of this conflict, the             unilaterally altered or
Court of Appeals concluded that the                      amended by a member
Legislature had repealed the Compact’s                   state; and (4) whether
election provision by implication *647                   the     modified     gross
when it enacted the BTA.5 The Court of                   receipts tax component
Appeals then stated that it did not need to              of       the     Michigan
decide whether the modified gross                        Business       Tax     Act
receipts tax was an “income tax” under                   constitutes an income
the Compact subject to the Compact’s                     tax under the Multistate
apportionment formula in light of its                    Tax Compact.[7]
conclusion that the Compact’s election
provision had been repealed by
implication.6

IBM sought leave to appeal in this Court.            II. STANDARD OF REVIEW
We granted IBM’s application and asked         [1] [2]
the parties to address                               We review de novo a Court of
                                               Claims decision on a motion for
         (1) whether the plaintiff             summary disposition.8 We also review de
         could elect to use the                novo issues of statutory interpretation.9
                                              expressly amended the ITA to the extent
                                              necessary to implement the SBTA and
                                              expressly repealed provisions of the ITA
                                              that would conflict with the SBTA.17 The
 *648 III. HISTORY OF BUSINESS                Legislature, however, did not expressly
    TAXATION IN MICHIGAN                      repeal the Compact.18
Because we believe it important to our
analysis in this case, we begin with a        The SBTA remained in effect until 2008,
discussion of the history of business         when the Legislature enacted the BTA,
taxation in Michigan. Michigan’s              which is at issue in this case.19
taxation of business income or activity       Representing another shift in business
began in 1953, when the Legislature           taxation, the BTA imposed two main
enacted a business activities tax that        taxes: the business income tax and the
taxed the adjusted receipts of a              modified gross receipts tax.20 In enacting
taxpayer.10 This tax remained **870 in        the BTA, the Legislature expressly
effect until Michigan adopted its first       repealed the SBTA, but again did not
corporate income tax as part of the           expressly     repeal    the     Compact.21
Income Tax Act of 1967 (ITA).11 Against       However, the BTA was short-lived.
the backdrop of the ITA, Michigan             Effective January 1, 2012, Michigan
joined the Multistate Tax Compact in          returned to a corporate income tax.22 At
1970 when the Legislature enacted MCL         **871 the same time, the *650
205.581.12 The Compact “symbolized the        Legislature stayed true to its past practice
recognition that, as applied to multistate    of repealing conflicting tax acts and
businesses,    traditional    state     tax   expressly repealed the BTA.23
administration was inefficient and costly
to both State and taxpayer.”13 Thus, the      Throughout the evolution of our state’s
goals of the Compact include facilitating     method of business taxation, the
and promoting equitable and uniform           Compact has remained in effect. Another
taxation of multistate taxpayers.14 To this   constant throughout this history is that
end, the *649 Compact operates in             the Legislature has always required a
conjunction with Michigan’s tax acts,         multistate taxpayer with business income
containing several provisions designed to     or activity both within and without the
ensure uniform taxation of multistate         state to apportion its tax base.24 This
taxpayers.                                    process,      known      as     formulary
                                              apportionment, has allowed Michigan to
In 1976, the Legislature replaced the         tax the portion of a taxpayer’s multistate
corporate income tax with a single            business carried on in Michigan without
business tax.15 Unlike its predecessor, the   violating the Due Process Clause of the
Single Business Tax Act (SBTA) taxed          United States Constitution.25 We now
business activity, not income, and            address whether a multistate taxpayer
operated as “a form of value added tax.”16    retained the privilege of electing the
In enacting the SBTA, the Legislature         apportionment method provided by the
Compact for the 2008 tax year.                  be allowed “only when the inconsistency
                                                and repugnancy are plain and
                                                unavoidable.”31 We will “construe
                                                statutes, claimed to be in conflict,
                                                harmoniously” to find “any other
IV. WHETHER IBM COULD ELECT                     reasonable *652 construction” than a
     TO USE THE COMPACT’S                       repeal by implication.32 Only when we
  APPORTIONMENT FORMULA                         determine that two statutes “are so
       FOR ITS 2008 TAXES                       incompatible that both cannot stand” will
To determine whether IBM could elect to         we find a repeal by implication.33
use     the    Compact’s      three-factor      [8] [9]
apportionment formula to calculate its                In attempting to find a harmonious
2008 Michigan taxes, we must decide if          construction of the statutes, we “will
the Legislature repealed the Compact’s          regard all statutes upon the same general
election provision by implication when it       subject-matter as part of one system....”34
enacted the BTA.26                              Further, “[s]tatutes in pari materia,
                                                although in apparent conflict, should, so
                                                far as reasonably possible, be construed
                                                in harmony with each other, so as to give
                                                force and effect to each....”35 This Court
      *651 A. LEGAL PRINCIPLES                  has stated:
[3] [4] [5] [6] [7]
              We begin our analysis “with
the axiom that repeals by implication are          It is a well-established rule that in the
disfavored.”27 We will presume, “in most           construction of a particular statute, or
circumstances, that if the Legislature had         in the interpretation of its provisions,
intended to repeal a statute or statutory          all statutes relating to the same subject,
provision, it would have done so                   or having the same general purpose,
explicitly.”28 Nevertheless, “[w]hen the           should be read in connection with it, as
intention of the legislature is clear, repeal      together constituting one law, although
by implication may be accomplished by              they were enacted at different times,
the enactment of a subsequent act                  and contain no reference to one
inconsistent with a former act” or “by the         another. The endeavor should be made,
occupancy of the entire field by a                 by tracing the history of legislation on
subsequent        enactment.”29        **872       the subject, to ascertain the uniform
However, “where the intent of the                  and consistent purpose of the
Legislature is claimed to be unclear, it is        legislature, or to discover how the
our duty to proceed on the assumption              policy of the legislature with reference
that the Legislature desired both statutes         to the subject-matter has been changed
to continue in effect unless it manifestly         or modified from time to time. In other
appears that such view is not reasonably           words, in determining the meaning of a
plausible.”30 Repeals by implication will          particular statute, resort may be had to
  the established policy of the legislature      to apportion and allocate in accordance
  as disclosed by a general course of            with article IV.... [39]
  legislation. With this purpose in view      This provision allows a taxpayer subject
  therefore it is proper to consider, not     to an income tax to elect to use a party
  only acts passed at *653 the same           state’s apportionment formula or the
  session of the legislature, but also acts   Compact’s three-factor apportionment
  passed at prior and subsequent              formula.
  sessions.[36]
In this case, the Compact’s election          *654 However, the Department rejected
provision and § 301 of the BTA share the      IBM’s attempts to apportion its income
common purpose of setting forth the           through the Compact’s apportionment
methods of apportionment of a                 formula. Instead, it required IBM to
taxpayer’s multistate business income;        apportion its BTA tax base consistently
therefore, we must construe them              with the BTA and its sales-factor
together as statutes in pari materia.37       formula. Section 301 of the BTA reads as
                                              follows:

                                                (1) Except as otherwise provided in
                                                this act, each tax base established
           B. APPLICATION                       under this act shall be apportioned in
[10]                                            accordance with this chapter.
    With the history of Michigan business
taxation and applicable legal principles in     (2) Each tax base of a taxpayer whose
mind, we turn to the specific statutes at       business activities are confined solely
issue. IBM sought to apportion its **873        to this state shall be allocated to this
BTA tax base using the Compact’s                state. Each tax base of a taxpayer
three-factor apportionment formula.38 In        whose business activities are subject to
so doing, IBM relied on the Compact’s           tax both within and outside of this state
election provision, which reads in              shall be apportioned to this state by
pertinent part:                                 multiplying each tax base by the sales
                                                factor calculated under section 303.[40]
   (1) Any taxpayer subject to an income      We recognize that the language of the
   tax whose income is subject to             BTA is mandatory in nature.41 Under the
   apportionment and allocation for tax       statute, a taxpayer’s BTA tax base must
   purposes pursuant to the laws of a         be apportioned through the BTA’s
   party state or pursuant to the laws of     sales-factor apportionment formula.42 The
   subdivisions in 2 or more party states     Department argues that this mandatory
   may elect to apportion and allocate his    language precludes the use of any other
   income in the manner provided by the       apportionment formula and, reading it in
   laws of such state or by the laws of       isolation, we would agree. However, as
   such states and subdivisions without       stated previously, § 301 of the BTA is
   reference to this compact, or may elect
not the only provision of Michigan’s tax       using    the    terms     “may     elect,”
laws pertaining to the apportionment of        contemplates a divergence between a
business       income—the        Compact’s     party state’s mandated apportionment
election provision shares the same             formula and the Compact’s own
purpose. Therefore, we cannot interpret §      formula—either at the time of the
301 of the BTA in a vacuum.43 Rather,          Compact’s adoption by a party state or at
we must *655 consider it along with the        some point in the future.47 Otherwise,
Compact “by tracing the history of             there would be no point in giving
legislation on the subject, to ascertain the   taxpayers an election between the two. In
uniform and consistent purpose of the          fact, reading the Compact’s election
legislature.”44                                provision    as    forward-looking—i.e.,
                                               contemplating the future enactment of a
The BTA is not the first Michigan              state income tax with a mandatory
business tax act to contain a mandatory        apportionment formula different from the
apportionment formula. All our past            Compact’s apportionment formula—is
business tax acts mandated that a              the only way to give meaning to the
taxpayer with **874 income or activity         provision when it was enacted in
that was taxable within and without the        Michigan.48 Viewed in this light, the
state allocate and apportion its tax base      BTA’s      mandatory       apportionment
consistently with each respective act.45       language may plausibly be read as
These acts further mandated that the tax       compatible with the Compact’s election
base be apportioned through a specific         provision.
apportionment formula.46 The mandatory
apportionment language of the BTA is           Moreover, our review of the statutes in
nearly identical to the language of its        pari materia indicates a uniform and
predecessors.                                  consistent purpose of the Legislature for
                                               the Compact’s election provision to
The Department argues that the                 operate alongside Michigan’s tax acts.49
Legislature repealed the Compact’s             Just as it did *657 when it enacted the
election provision when it enacted *656        ITA,50 the Legislature, **875 in enacting
the BTA because § 301 of the BTA is the        the BTA, had full knowledge of the
first tax provision with apportionment         Compact and its provisions.51 Even with
language directly in conflict with the         such knowledge on both occasions, the
Compact’s election provision. The              Legislature left the Compact’s election
import of this argument is that the            provision intact. By contrast, the
Compact’s election provision was a dead        Legislature expressly repealed or
letter when it was enacted because both        amended      other    inconsistent   acts
the ITA and the election provision             regarding the taxation of businesses.52
required use of the same three-factor          Had the Legislature believed that the
apportionment formula. However, the            Compact’s election provision no longer
Department’s argument overlooks that           had a place in Michigan’s tax system or
the Compact’s election provision, by           conflicted with the purpose of the BTA,
it could have taken the necessary action     Compact’s election provision by adding
to eliminate the election provision.         the following language:

Because the Legislature gave no clear
indication that it intended to repeal the       [E]xcept that beginning January 1,
Compact’s election provision, we                2011 any taxpayer subject to the
proceed under the assumption that the           Michigan business tax act, 2007 PA
Legislature intended for both to remain         36, MCL 208.1101 to 208.1601, or the
in effect.53 After reading the statutes in      income tax act of 1967, 1967 PA 281,
pari materia, we conclude that a                MCL 206.1 to 206.697, shall, for
reasonable construction exists other than       purposes of that act, apportion and
a repeal by implication.54 Under Article        allocate in accordance with the
III(1) of the Compact, the Legislature          provisions *659 of that act and shall
provided a multistate taxpayer with a           not apportion or allocate in accordance
choice between the apportionment                with article IV.[[[57]
method contained in the Compact or the       There is no dispute that the Legislature
apportionment method required by             specifically intended to retroactively
Michigan’s tax laws. If a taxpayer elects    repeal the Compact’s election provision
to apportion its income through the          for taxpayers subject to the BTA
Compact, Article IV(9) mandates that the     beginning January 1, 2011. The
*658 taxpayer do so using a three-factor     Legislature      could    have—but      did
apportionment formula. Alternatively, if     not—extend this retroactive repeal to the
the taxpayer does not make the Compact       start date of the BTA. In addressing this
election, then the taxpayer must use the     legislation, the dissent suggests that “the
apportionment formula set forth in           2011 Legislature may have simply been
Michigan’s governing tax laws. In this       acting expressly to confirm what the
case, IBM’s tax base arose under the         2007 Legislature believed it had already
BTA. Had it not elected to use the           done implicitly.”58 We would agree with
Compact’s apportionment formula, IBM         that conclusion if the Legislature had
would have been required to apportion its    retroactively repealed the Compact’s
tax base consistently with the mandatory     election provision beginning January 1,
language of the BTA-i.e., through the        2008, the effective date of the BTA.
BTA’s       sales-factor   apportionment     However, by only repealing the
formula. Thus, we believe the BTA and
         55                                  Compact’s election provision starting
the Compact are compatible and can be        January 1, 2011, the Legislature created a
read as a harmonious whole.                  window in which it did not expressly
                                             preclude use of the Compact’s election
Subsequent action by the Legislature         provision for BTA taxpayers. Further, we
indicates that it did not impliedly repeal   believe that the express repeal of the
the Compact’s election provision when it     Compact’s election provision effective
enacted the BTA.56 On May 25, 2011, the      January 1, 2011, is evidence that the
**876 Legislature expressly amended the      Legislature had not impliedly repealed
the provision when it enacted the BTA.59       Rather, by using the applicable canons of
Therefore, a review of the 2011                construction and faithfully applying our
amendments supports our conclusion that        precedents in this area, we have arrived
the Compact’s election provision               at a reasonable construction that
remained in effect for the 2008 tax year.      harmonizes the BTA and the Compact.64

                                               The dissent agrees that “every attempt”
                                               must be made to construe the BTA and
                                               the Compact harmoniously. But, in the
   C. RESPONSE TO THE DISSENT                  end, the dissent fails to heed this call.
[11]
      The dissent’s analysis has a             Instead, because of its rigid focus on the
tantalizing simplicity to it. It homes in on   mandatory language of the BTA—to the
the plain language and mandatory *660          exclusion of the language and history of
nature of the BTA’s apportionment              the Compact, and its place in Michigan’s
provision. However, the dissent spends         taxation scheme—the dissent’s analysis
very little time considering the language      is at odds with our longstanding
of the Compact, its history, or the history    implied-repeal jurisprudence.
of business taxation in Michigan. While
this approach may be proper in
construing the BTA in a typical case, it is
incomplete when we are faced with the                 D. CONCLUSION AS TO THE
question of implied repeal. Under such                ISSUE OF IMPLIED REPEAL
circumstances, that the dissent has
                                               [12]
arrived at the better or even the best              In sum, because we are able to
interpretation of the BTA does not end the     harmonize the BTA and the Compact’s
inquiry. Rather, because there is a            election provision, we conclude that the
presumption against implied repeals,60 it      statutes are not “ ‘so incompatible that
is our task to determine if there is any       both cannot stand.’ ”65 We believe that
other reasonable construction that would       our interpretation allows the Compact’s
harmonize the two statutes and avoid a         election provision to serve its purpose of
repeal by implication.61                       providing uniformity to multistate
                                               taxpayers in light of Michigan’s
Repeals by implication are rare, and           enactment of an apportionment formula
properly so, given that we will presume        different from the Compact’s formula.
under most circumstances that “if the          Any conflict apparent from a first
Legislature **877 had intended to repeal       reading of these statutes is reconcilable
a statute or statutory provision, it would     when the statutes are read in pari
have done so explicitly.”62 They are even      materia.66 Therefore, the Department has
more unlikely in the realm of our state’s      failed to overcome *662 the presumption
taxation laws.63 This certainly creates a      against     repeals    by      implication.
very *661 high bar, but we disagree with       Accordingly, the Court of Appeals erred
the dissent that we have made it absolute.     by holding that the Legislature repealed
the Compact’s election provision by                  measured by net income
implication when it enacted the BTA.                 including       any   tax
Instead, we hold that the Compact’s                  imposed on or measured
election provision was available to IBM              by an amount arrived at
for the 2008 tax year.67                             by deducting expenses
                                                     from gross income, 1 or
                                                     more forms of which
                                                     expenses        are  not
                                                     specifically and directly
    **878 V. WHETHER THE                             related to particular
MODIFIED GROSS RECEIPTS TAX                          transactions.[69]
IS AN INCOME TAX UNDER THE
           COMPACT
                                            Under the Compact’s broad definition, a
[13]
    Having determined that IBM could        tax is an income tax if the tax measures
elect to use the Compact’s apportionment    net income by subtracting expenses from
formula for the 2008 tax year, we must      gross income, with at least one of the
next consider whether IBM could             expense deductions not being specifically
apportion its entire BTA tax base through   and directly related to a particular
the Compact’s apportionment formula.        transaction.70
IBM’s 2008 BTA tax base contained two
components: the business income tax         “Modified gross receipts tax” is not
base and the modified gross receipts tax    defined by the BTA, but MCL
(MGRT) base. The parties quarrel over       208.1203(2) states, “[The MGRT] levied
whether both components may be              and imposed under this section is upon
apportioned under the Compact. The          the privilege of *664 doing business and
Compact election is available to “[a]ny     not upon income or property.” Although
taxpayer subject to an income tax.”68       this statement indicates that the MGRT is
While it is undisputed that the business    not a tax upon income under the BTA,
income tax is an income tax, the            we must still determine whether the
Department argues that the *663 MGRT        MGRT fits under the broad definition of
is not an income tax, but rather a gross    “income tax” under the Compact.
receipts tax not subject to the Compact’s
election provision. Therefore, we must      The MGRT base is “a taxpayer’s gross
determine whether the MGRT is an            receipts ... less purchases from other
income tax under the Compact and, thus,     **879 firms....”71 The BTA defines
apportionable under the Compact’s           “gross receipts” as
three-factor apportionment formula.
[14]
    The Compact defines “income tax” as       the entire amount received by the
follows:                                      taxpayer as determined by using the
                                              taxpayer’s method of accounting used
         [A] tax imposed on or                for federal income tax purposes, less
   any amount deducted as bad debt for         independent contractors.76 Once gross
   federal income tax purposes that            receipts is reduced by any applicable
   corresponds to items of gross receipts      deductions, the taxpayer arrives at its
   ..., from any activity whether in           MGRT base, which is then subject to the
   intrastate, interstate, or foreign          MGRT at a rate of .80 percent after
   commerce carried on for direct or           allocation or apportionment to this state.77
   indirect gain, benefit, or advantage to
   the taxpayer or to others.... [72]          Having examined how a taxpayer’s
Not only is the gross receipts amount          MGRT base is calculated, we now turn to
reduced by numerous exclusions, it is          the question whether the MGRT fits
also subject to a deduction for the            within the Compact’s definition of
“amount deducted as bad debt for federal       “income tax.” For the MGRT to be an
income tax purposes that corresponds to        income tax under the Compact, a tax
items of gross receipts included in the        must measure net income by starting
modified gross receipts tax base.”73 This      with gross income and subtracting
total—the entire amount received by the        expenses, with at least one of the expense
taxpayer from any activity minus the           deductions not specifically and directly
bad-debt deduction and the numerous            related to a particular transaction.78 The
exclusions under MCL 208.1111—is the           Compact and the BTA do not define
gross receipts base from which the             “gross income.” Therefore, we look
MGRT liability originates.                     elsewhere to determine what normally
                                               constitutes gross income. The Internal
After the taxpayer determines its gross        Revenue Code defines “gross income” as
receipts through the above calculation,        “all income from whatever source
the taxpayer then reduces the gross            derived” and includes a nonexclusive list
receipts base by “purchases from other         of items that includes things such as
firms.”74 The “purchases from other            “gross income derived *666 from
firms” deductions include, among other         business” and “gains derived from
things, “inventory acquired during *665        dealings in property.”79 **880 26 C.F.R.
the tax year, including freight, shipping,     § 1.61–1 provides that “[g]ross income
delivery, or engineering charges included      includes income realized in any form,
in the original contract price”; “assets ...   whether in money, property, or services.”
acquired during the tax year of a type         26 C.F.R. § 1.61–3 further provides that
that are, or under the internal revenue        gross income for manufacturing,
code will become, eligible for                 merchandising, or mining businesses is
depreciation, amortization, or accelerated     “the total sales, less the cost of goods
capital cost recovery for federal income       sold, plus any income from investments
tax purposes”; and materials and supplies      and from incidental or outside operations
to the extent not included in inventory or     or sources.” Moreover, Black’s Law
depreciable property.75 There are also         Dictionary states that gross income
deductions for compensation paid in            means “[t]otal income from all sources
certain industries and for payments to         before deductions, exemptions, or other
tax reductions.”80                             the taxpayer as determined from any
                                               gainful activity minus inventory and
These definitions of gross income are          certain other deductions that are expenses
similar to the definition of gross receipts    not specifically and directly related to a
under the BTA—the entire amount                particular transaction. Therefore, IBM
received by the taxpayer as determined         could elect to use the Compact’s
from any gainful activity. Like gross          apportionment formula for that portion of
income under the Internal Revenue Code,        its tax base subject to the MGRT for the
gross receipts are subject to myriad           2008 tax year.85
exclusions and deductions. Notably,
gross receipts are subject to a reduction
for the purchase of inventory during the
tax year, including freight, shipping,
delivery, or engineering charges included                VI. CONCLUSION
in the original contract price. This is        We conclude that Court of Appeals erred
similar to the IRS’s definition of “gross      by holding that the BTA repealed the
income”          for         manufacturing,    Compact’s election provision by
merchandising,            or        mining     implication. Therefore, IBM could elect
businesses—total sales less the cost of        to    use     **881      the Compact’s
goods sold.81 In addition, several of these    apportionment formula during the 2008
exclusions or deductions are not               tax *668 year. We further hold that IBM
specifically and directly related to           could use the Compact’s apportionment
particular transactions.82 Depreciable         formula to apportion its MGRT base
*667 assets can be assets used over a          under the BTA. Accordingly, we reverse
certain number of years and, thus, not         the Court of Appeals’ judgment in favor
related to a single transaction.83 Materials   of the Department, reverse the Court of
and supplies purchased during a tax year       Claims’ order granting summary
can be used at any time for the operation      disposition in favor of the Department,
of a business and for any amount of            and remand to the Court of Claims for
transactions. Finally, the purchase of         entry of an order granting summary
inventory, which includes such things as       disposition in favor of IBM.
goods held for resale or raw materials,
some of which can stay in a taxpayer’s
warehouse for an indeterminate amount
of time, can be an expense not
specifically or directly related to a          CAVANAGH and MARKMAN, JJ.,
particular transaction.84                      concurred with VIVIANO, J.

We hold that the MGRT fits within the          ZAHRA, J. (concurring).
broad definition of “income tax” under
the Compact by taxing a variation of net       I agree with the lead opinion’s holding
income—the entire amount received by           that IBM was entitled to use the
Compact’s         elective    three-factor     shall be deemed a reference to the
apportionment and allocation formula for       re-enacted provision.
its 2008 Michigan taxes. I also agree          Pursuant to this provision, we must
with both the lead opinion and the             construe the Compact as though it had
dissenting opinion that the tax bases at       not been impliedly repealed.2
issue here are “income taxes” within the     That said, the BTA’s exclusive
meaning of the Compact. Whether the          apportionment method remains in
Legislature repealed the Compact’s           conflict with the election provision of the
election provision by implication when it    Compact. This conflict, in my view, is
enacted the BTA is a very close question.    easily resolved because the Legislature in
I would not reach that question because      2011 also expressly supplemented the
the Legislature made clear that taxpayers    Compact. This new provision is not “the
are entitled to use the Compact’s election   same as those of prior laws” and is a
provision for the 2008, 2009, and 2010       “new enactment,” which expressly
tax years.                                   provides that a taxpayer could elect to
                                             apportion its income under article IV of
Assuming that the Legislature impliedly      the Compact
repealed    the    Compact’s      election
provision in 2008 by enacting the BTA,                except that beginning
IBM could nonetheless avail itself of the             January 1, 2011 any
Compact’s election provision for tax                  taxpayer subject to the
years 2008 through 2010 because the                   Michigan business tax
Legislature, in 2011, clearly intended to             act, 2007 PA 36, MCL
provide multistate taxpayers the benefit              208.1101 to 208.1601,
of the Compact’s election provision for               or the income tax act of
these tax years. Specifically, on May 25,             1967, 1967 PA 281,
2011, the Legislature necessarily                     MCL 206.1 to 206.697,
re-enacted all the provisions of the                  shall, for purposes of
Compact, and ordered that act to take                 that act, apportion and
immediate effect.1 MCL 8.3u provides                  allocate in accordance
that                                                  with the provisions of
                                                      that act and shall not
                                                      apportion or allocate in
  *669 [t]he provisions of any law or                 accordance with article
  statute which is re-enacted, amended                IV.[3]
  or revised, so far as they are the same
  as those of prior laws, shall be           **882 There can be no dispute given this
  construed as a continuation of such        language that the Legislature specifically
  laws and not as new enactments. If any     intended to retroactively repeal the
  provision of a law is repealed and in      Compact’s election provision beginning
  substance re-enacted, a reference in       January 1, 2011. Further, I conclude that
  any other law to the repealed provision    this language contemplates that any
taxpayer could avail itself of the           Dissenting Opinion by McCORMACK,
Compact’s election provision for tax         J.
years 2008 through 2010. This is because
the Legislature, either under the *670
original enactment of the Compact4           McCORMACK, J. (dissenting).
(assuming the Legislature did not repeal
the Compact’s election provision by          I respectfully dissent because I conclude
implication when it enacted the BTA) or      that the Michigan Business Tax Act
under the above re-enactment and             (BTA), MCL 208.1101 et seq., requires
supplementation of the Compact5              taxpayers to apportion their multistate
(assuming the Legislature repealed the       income in accordance with the BTA’s
Compact’s election provision by              sales-only apportionment formula and
implication when it enacted the BTA),        without resort to the Multistate Tax
chose to commence its express repeal of      Compact’s election provision. I reach
the Compact’s election provision on          this result because the Legislature’s *671
January 1, 2011, even though the conflict    command—“each tax base established
between the BTA and the Compact had          under this act shall be apportioned in
existed from the 2008 tax year. Simply       accordance with this chapter,” MCL
put, the contrapositive of the Compact’s     208.1301(1) (emphasis added)—is plain,
supplemental provision must mean that        unambiguous, and permits only one
before January 1, 2011, a taxpayer could,    interpretation. Further, there is no
“for purposes of that act [the ITA or the    constitutional barrier that prevents the
BTA], apportion and allocate in              Legislature from making the Compact’s
accordance with the provisions of [the       alternative election provision unavailable
ITA or the BTA] and [may] apportion or       to taxpayers. I would affirm the judgment
allocate in accordance with article IV” of   of the Court of Appeals.
the Compact. This is, in my opinion, the
most reasonable understanding of this
legislation.
                                                  I. AN IRRECONCILABLE
In sum, the Legislature in 2011 created a         CONFLICT OF STATUTES
window in which it intended the
Compact’s election provision to apply. In    The threshold issue is, at its core, one of
this case, IBM sought to “apportion and      statutory interpretation. When the
allocate” its taxes under the BTA well       language of a statute is unambiguous, we
before January 1, 2011, and therefore        give effect to its plain meaning. Ter Beek
may apportion or allocate its taxes in       v. City of Wyoming, 495 Mich. 1, 8, 846
accordance with article IV of the            N.W.2d 531 (2014). It is hard to imagine
Compact. For this reason, I concur in the    a more unambiguous command than the
result reached in the lead opinion.          mandatory directive found in § 301 of the
                                             BTA: “Except as otherwise provided in
                                             this act, each tax base established under
this act shall be apportioned in                results: either taxes established under the
accordance with this chapter.” MCL              BTA need not be apportioned “in
208.1301(1). There is no “otherwise             accordance with this chapter,” as § 301
provided” exception in the BTA that             demands, or taxpayers may not elect to
would aid IBM in its **883 attempt to           use the Compact formula to apportion tax
avoid     the    statute’s    sales-only        bases established under the BTA. While I
apportionment requirement. And, within          agree with the lead opinion that statutes
Chapter 208 of the Michigan Compiled            that appear to be conflict should be read
Laws, it is the BTA alone that provides         together and reconciled, if reasonably
the formula by which taxpayers are to           possible, Rathbun v. State of Michigan,
apportion their multistate income. See          284 Mich. 521, 544, 280 N.W. 35 (1938),
MCL 208.1301(2); MCL 208.1303(1).               I disagree that this is a case where
Neither     the   Compact     nor     its       reconciliation is possible. The differing
apportionment provisions are referred to        opinions offered *673 by this Court here
anywhere in the BTA.                            make the underlying conflict undeniably
                                                plain. The Compact and the BTA are
I share the lead opinion’s view that we         irreconcilably      in     conflict;     one
must make every attempt “to construe            statute—either the Compact or the
statutes, claimed to be in conflict,            BTA—must prevail over the other. And
harmoniously[.]” Wayne Co. Prosecutor           neither alternative is easily dismissed.
v. Dep’t of Corrections, 451 Mich. 569,         Traditional rules of construction lead me
577, 548 N.W.2d 900 (1996).1 When               to resolve the conflict in favor of the later
later enacted legislation irreconcilably        enacted and more specific legislation.
*672 conflicts with a prior act, however,       See Kalamazoo v. KTS Indus., Inc., 263
“the last expression of the legislative will    Mich.App. 23, 38–39, 687 N.W.2d 319
must control.” Jackson v. Mich.                 (2004) (resolving a direct conflict
Corrections Comm., 313 Mich. 352, 356,          between two statutes in favor of the
21 N.W.2d 159 (1946).                           subsequently enacted legislation).

Section 301(1) of the BTA directs that          The lead opinion agrees that the plain
taxes established under the BTA be              language of § 301 is mandatory. But it
apportioned “in accordance with this            asserts that § 301 can nevertheless be
chapter.” “[T]his chapter” requires             interpreted as permitting taxpayers to
taxpayers      to   use     a      sales-only   make the Compact election. I do not see
apportionment formula. The Compact,
                         2
                                                how this interpretation of the BTA is
however, provides that “[a]ny taxpayer          reasonable. If a taxpayer can elect an
subject to an income tax [3] ... may elect to   alternative apportionment formula, then §
apportion” its income in accordance with        301 is **884 in no sense mandatory.
the          Compact’s           three-factor   Quite the opposite: § 301’s mandatory
apportionment formula. MCL 205.581,             apportionment “in accordance with this
Art. III(1). Reading these provisions side      chapter”     becomes     optional.    By
by side, I see two, and only two, possible      interpreting § 301 as permitting
taxpayers to make the Compact election,       relying on the fact that the Legislature
the lead opinion has not, as it claims,       has expressly repealed and amended tax
settled on a harmonious construction of       statutes in the past, simply states that
the BTA and the Compact. Rather, it has       “[h]ad the Legislature believed that the
resolved the conflict in favor of the         Compact’s election provision no longer
Compact, the earlier enacted statute. But     had a place in Michigan’s tax system ...,
our precedent is clear: when an               it could have taken the necessary action
irreconcilable conflict exists, as in this    to eliminate the election provision.” Ante
case, the later enacted legislation           at 875. Because it did not, the lead
controls. Jackson, 313 Mich. at 356, 21       opinion      “proceed[s]      under    the
N.W.2d 159; see also Washtenaw Co.            assumption that the Legislature intended
Rd. Comm’rs v. Pub. Serv. Comm., 349          for [the Compact’s election provision] to
Mich. 663, 680, 85 N.W.2d 134 (1957).         remain in effect.” Ante at 875. This, of
Because I am not convinced that the two       course, simply assumes the lead
statutes can be read harmoniously, I          opinion’s conclusion that there was no
believe that, for tax years 2008 through      repeal. Yes, repeals by implication are
2010, the enactment of the BTA                disfavored, and that the Legislature
impliedly repealed the Compact’s              knows how to effect an express repeal is
election provision.                           irrefutable. But by demanding that the
                                              Legislature     take    “the     necessary
The lead opinion tries to give some effect    action”—i.e., expressly amend or repeal
to § 301 by stating that a taxpayer “must     the Compact—the lead opinion has
use the apportionment formula set forth       elevated the presumption against implied
in” the BTA if it does not make the *674      repeals into an absolute bar.
Compact election. Ante at 875. This
construction does not make § 301’s            Having failed to adequately explain why
mandatory directive “mandatory” at all.       the statutory language itself permits the
When a taxpayer is given a choice as to       result it reaches, the lead opinion anchors
whether they will apportion their income      its analysis in a historical overview of
in accordance with the BTA’s sales-only       business taxation in Michigan. While
formula, the number of alternative            informative, I find this approach
options—a single one, or more—is              ultimately unpersuasive. The lead
irrelevant. As long as an alternative         opinion argues that because the Compact
option exists, the taxpayer may, not must,    was enacted at a time when Michigan
use the apportionment formula set forth       law applied the same three-factor
in the BTA. And once the lead opinion’s       apportionment *675 formula as that
“mandatory” construction is revealed to       provided in the Compact, the Legislature,
be anything but that, I do not believe that   in enacting it, must have anticipated the
the lead opinion has persuasively             future enactment of a tax act requiring a
explained why the BTA did not impliedly       different apportionment formula and
amend or repeal the Compact’s election        intended for the Compact to prevail
provision. Rather, the lead opinion,          should a conflict arise. But even
assuming that the lead opinion is correct,     throws light on doubtful language, and
that interpretation reads into the Compact     for future cases it has authority.”); Frey
a policy choice by the 1970 Legislature        v. Michie, 68 Mich. 323, 327, 36 N.W.
that the 2008 Legislature was free to          184 (1888) (“It is unnecessary to say
disagree with, either by enacting an           more than that a *676 legislative
income tax with a different, mandatory         interpretation of old laws has no judicial
apportionment formula, as it did in 2008,      force. Whether right or wrong must be
or by repealing the election provision         determined by the statutes themselves.”).
outright, as it did in 2011. See Studier v.    The question we must answer in this case
Mich. Pub. Sch. Employees’ Retirement          concerns what the Legislature intended
Bd., 472 Mich. 642, 661, 698 N.W.2d            when it enacted the BTA-not what it
350 (2005) (“[A] fundamental principle         intended when it enacted the Compact
of the jurisprudence **885 of both the         forty years earlier or amended it three
United States and this state is that one       years later. While in answering this
legislature cannot bind the power of a         question the 2011 amendment may be
successive legislature.”).                     considered “with some care, so far as it
                                               throws light on doubtful language,”
The lead opinion underscores its error by      Baxter, 57 Mich. at 132, 23 N.W. 711,
attaching particular significance to 2011      that light does not shine on the lead
PA 40, which expressly amended the             opinion’s argument.
Compact to make the election
unavailable to BTA taxpayers beginning         In my view the BTA made the Compact
January 1, 2011. The effect of this            election unavailable. Because the statutes
amendment on tax years 2011 and                are irreconcilably in conflict, the latter,
beyond is plain to see, but whether the        as the more specific and later enacted
amendment lends force to IBM’s position        statute, must be given effect over the
in this dispute is not. In enacting this       former. For this reason, I disagree with
amendment, the 2011 Legislature may            the lead opinion that the BTA’s
have simply been acting expressly to           mandatory directive can be interpreted so
confirm what the 2007 Legislature              as to allow BTA taxpayers to make the
believed it had already done implicitly.       Compact election instead. As a result, I
And even if the 2011 Legislature was           find it necessary to address IBM’s
expressing its view that the BTA did not,      argument that the Legislature was not
in fact, repeal the election provision, this   constitutionally permitted to make the
Court is not bound by the prior                BTA’s sales-only apportionment formula
Legislature’s construction of the earlier      exclusive and mandatory without first
enactment. See Baxter v. Robertson, 57         repealing the Compact in its entirety.
Mich. 127, 132, 23 N.W. 711 (1885)
(“Legislative construction of past
legislation has no judicial force except
for the future. But it is always entitled to
be considered with some care, so far as it
 II. THE LEGISLATURE WAS NOT                   carry the supreme force of federal law,
 BARRED FROM UNILATERALLY                      IBM believes that the Legislature could
     AMENDING THE COMPACT                      not impose an exclusive apportionment
                                               formula because the Compact supersedes
IBM asks this Court to invoke the              conflicting state law in any event. This is
authority of “compact law” and hold that       contrary to our well-established rule that
the Legislature, even had it intended to       a statute can be amended, repealed, or
alter the Compact’s election provision         superseded, in whole or in *678 part,
when it enacted the BTA, was prohibited        expressly or impliedly, by a subsequently
from doing so.4 I would decline that           enacted statute. LeRoux v. Secretary of
invitation.                                    State, 465 Mich. 594, 615, 640 N.W.2d
                                               849 (2002) (“Absent the creation of
*677 The United States Constitution            contract rights, the later Legislature is
provides that “[n]o State shall, without       free to amend or repeal existing statutory
the **886 Consent of Congress ... enter        provisions.”). The essence of IBM’s
into any Agreement of Compact with             argument is that because a compact is an
another State[.]” U.S. Const., art. I, § 10,   agreement between Michigan and the
cl. 3. As the Supreme Court explained in       other member states, it is not like any
U.S. Steel Corp. v. Multistate Tax             other state law subject to traditional
Comm., 434 U.S. 452, 98 S.Ct. 799, 54          principles of statutory construction, but
L.Ed.2d 682 (1978), the clause is not to       rather it has some greater force and
be read strictly, but only as requiring        authority. As a result, any variation from
congressional consent for compacts that        the Compact’s terms is strictly
tend to increase the political power of the    prohibited. In support of this proposition,
states in a way that “may encroach upon        IBM cites as persuasive authority
or interfere with the just supremacy of        McComb v. Wambaugh, 934 F.2d 474,
the United States.” Id. at 471, 98 S.Ct.       479 (C.A.3, 1991), and CT Hellmuth &
799 (quotation marks and citation              Assoc., Inc. v. Washington Metro. Area
omitted). Those compacts that receive          Transit Auth., 414 F.Supp. 408, 409
congressional authorization and fall           (D.Md., 1976). Neither case, in my view,
within the scope of the Compact Clause         supports such a rule.
are treated as federal law. Cuyler v.
Adams, 449 U.S. 433, 440, 101 S.Ct.            In McComb, the plaintiff, as guardian ad
703, 66 L.Ed.2d 641 (1981). Compacts           litem for a minor child, brought a suit
without       congressional       approval,    against the city of Philadelphia and its
however, are not transformed into federal      employees under 42 U.S.C. § 1983. The
law; thus their construction is a matter of    suit sought damages for injuries the child
state statutory law.                           suffered as a result of parental abuse.
                                               Before he was injured the child was
Notwithstanding the fact that the              under the protective custody of a
Multistate Tax Compact, as a compact           Virginia court. The Virginia court
without congressional approval, does not       ordered that the child be returned to his
parental home in Philadelphia, where the     authority for the above emphasized
abuse occurred. Plaintiff argued that the    rule—that         compacts         without
Virginia court order, in conjunction with    congressional approval cannot be
the Interstate Compact for Placement of      unilaterally amended and must take
Children (ICPC), a compact to which          precedent     over     conflicting    state
Pennsylvania and Virginia are parties        law—and I have found none. Moreover,
that had not been congressionally            the unsupported statement contradicts the
approved, extended the jurisdiction of the   one that precedes it. Either the compact
Virginia court into Pennsylvania and         must be construed as state law or it must
thereby imposed a legal duty on the          be construed as something with greater
Philadelphia social workers. The United      authority than state law, but the McComb
States Court of Appeals for the Third        court said both. Finally, this statement
Circuit rejected this argument, ultimately   was dictum, because the court did not
concluding that the ICPC did not apply       identify any potential conflict between
when a child is returned by the *679         the ICPC and Pennsylvania law and the
sending state to a natural parent residing   court ultimately determined that the
in another state. McComb, 934 F.2d at        ICPC did not apply. Id. at 482.
482.
                                             In CT Hellmuth, the plaintiff sought to
IBM cites the Third Circuit’s discussion     compel disclosure of documents under
of the scope of the ICPC for its argument    Maryland law. The defendant, an
here:                                        interstate agency formed by an interstate
                                             compact between Maryland, Virginia,
  Because Congressional consent was          and the District of Columbia, argued that
  neither given nor required, the [ICPC]     its status as an interstate agency
  does not express federal law.              exempted it from the Maryland law. In
  Consequently, this Compact must be         granting the defendant’s motion for
  construed as state law....                 summary judgment, the court remarked
                                             that
  Nevertheless,       uniformity      of
  interpretation is important in the           *680 when enacted, a compact
  construction of a Compact because in         constitutes not only law, but a contract
  some contexts it is **887 a contract         which may not be amended, modified,
  between the participating states.            or otherwise altered without the
  Having entered into a contract, a            consent of all parties. It, therefore,
  participant state may not unilaterally       appears settled that one party may not
  change its terms. A Compact also takes       enact legislation which would impose
  precedence over statutory law in             burdens upon the compact absent the
  member states. [McComb, 934 F.2d at          concurrence of the other signatories.
  479 (citations omitted; emphasis             [CT Hellmuth, 414 F.Supp. at 409.]
  added).]
                                             CT Hellmuth and the cases it relied upon,
The McComb court did not cite any
however,      involved    congressionally         *681 III. UNILATERAL
approved compacts, which, as explained,       AMENDMENT OF MCL 205.581,
supersede subsequent state law by virtue      ART. III(2) DOES NOT VIOLATE
of the Supremacy Clause. Cuyler, 449            THE STATE OR FEDERAL
U.S. at 440, 101 S.Ct. 703.                       CONTRACTS CLAUSE

IBM’s claim that the Compact trumps the      In evaluating whether § 301 of the BTA
BTA simply because of its status as a        unconstitutionally impairs a contract, the
compact relies on the faulty premise that    threshold question is whether the
the distinction between compacts that        Compact did, in fact, create a contractual
have congressional approval and those        relationship in the first instance. I do not
that do not is unimportant, and that all     believe **888 that it did. Two factors
compacts are immune to unilateral            weigh heavily in this conclusion. First,
modification by their member states          the member states’ courses of conduct
because “[a] Compact ... takes               indicate that there is no contractual
precedence over statutory law in member      obligation to strictly adhere to Articles
states.” McComb, 934 F.2d at 479. This       III and IV of the Compact. Second, the
assumes too much. Any immunity, if it        Compact is silent regarding a member
exists, is a result of a compact’s dual      state’s authority to enact exclusive
nature as both state law and a contract      apportionment formulas that differ from
among its member states. See Green v.        the Compact’s formula.
Biddle, 21 U.S. (8 Wheat.) 1, 5 L.Ed 547
(1823) (recognizing that an interstate       Starting with the obvious: taxpayers like
compact can be a contract). As a result      IBM were not parties to the Compact. To
the Legislature is free to amend or repeal   the extent that the Compact can be
an existing statutory provision as long as   viewed as a contract, it is an agreement
it does not impair a contractual             between its member states, not between
obligation. LeRoux, 465 Mich. at 615,        taxpayers and the states.5 The Compact
640 N.W.2d 849; see U.S. Const., art. I,     member states’ courses of performance
§ 10, cl. 1; Const. 1963, art. 1, § 10. In   are critical to understanding the nature of
other words, the Legislature is prohibited   the agreement. As the Supreme Court
from unilaterally amending the Compact       recently explained, a party’s course of
only if that amendment impairs               performance is “highly significant”
contractual obligations created by the       evidence of the party’s understanding of
Compact itself. When viewed as a matter      the Compact’s terms. Tarrant Regional
of contract law, I believe that it was       Water Dist. v. Herrmann, 569 U.S. ––––,
within the Legislature’s power to require    133 S.Ct. 2120, 2135, 186 L.Ed.2d 153
BTA taxpayers to apportion their             (2013) (citation and quotation marks
multistate income solely in accordance       omitted).6 Here, it is plain that the
with § 301.                                  member states did not view *682 strict
                                             adherence to Articles III and IV as a
                                             binding contractual obligation, as
Compact members have deviated from             N.W.2d 350. While it is true that the
the Compact’s election provision and           Compact **889 does not expressly allow
apportionment formula without objection        Michigan to adopt a different
from other members. Arkansas, for              apportionment formula, neither does the
example, has retained the Compact’s            Compact surrender the state’s right to do
election provision but changed the             so. When the state’s sovereign power of
Compact formula to place additional            taxation is implicated, as it is here, any
emphasis on the sales factor. Ark Code         uncertainty should be resolved in favor
26–5–101, Art. IV(9). Nondeviating             of concluding that the state did not cede
members have not pursued actions               that power. See Tarrant, 133 S.Ct at
against those states that have deviated,       2132 (recognizing that states “do not
and no member state has intervened on          easily cede their sovereign powers”).
IBM’s behalf in this case. Further, the        Admittedly, any sovereignty concerns are
Multistate     Tax     Commission—the          abated by the fact that a member state
organization charged with administering        may withdraw from the Compact,
the Compact—has urged us to reject             unilaterally and without repercussion, at
IBM’s rigid interpretation of the              any time. MCL 205.581, Art X(2). But
Compact. These facts weigh heavily in          this withdrawal provision is equally
favor of rejecting IBM’s argument that         strong evidence that the member states
the Compact creates a binding                  did not intend to be contractually bound,
contractual obligation on its member           as it demonstrates the member states’
states to refrain from amending the            desire to retain control over their
election provision.7                           sovereignty with respect to taxation.
                                               Moreover, if continued participation in
Deference to principles of state               the Compact is, essentially, completely
sovereignty leads me to the same               voluntary, I fail to see how its terms can
conclusion. As this Court explained in         be construed as creating binding
Studier, 472 Mich. at 661, 698 N.W.2d          contractual obligations, especially in
350, there is a “strong presumption that       light of the presumption against such an
statutes do not create contractual rights.”    interpretation. Studier, 472 Mich. at 661,
This presumption is grounded in the            698 N.W.2d 350.8
principle that “surrenders of legislative
power are subject to strict limitations that
have developed in order to protect the
sovereign     prerogatives      of     state
governments.” Id. IBM has not overcome                   IV. CONCLUSION
this presumption here. The Compact’s           I would affirm the judgment of the Court
silence on the effect of a member state’s      of Appeals because the Legislature
ability    to    elect     an     exclusive    expressly provided that taxes *684
apportionment formula indicates that           established under the BTA “shall be in
Michigan did not contract away its right       accordance with” the BTA’s sales-only
to do exactly *683 that. Id. at 662, 698       apportionment      formula.    Allowing
taxpayers to apportion their multistate                        YOUNG, C.J., and KELLY,                             J.,
income in accordance with the                                  concurred with McCORMACK, J.
Compact’s       formula     violates this
unambiguous directive. And because the
state was not contractually obligated to                       Parallel Citations
allow taxpayers to make the Compact
election, the BTA does not offend the                          852 N.W.2d 865
state or federal constitutions.


    Footnotes
1      MCL 205.581 et seq.


2      MCL 208.1101 et seq.


3      IBM v. Dep’t of Treasury, unpublished opinion per curiam of the Court of Appeals, issued November 20,
       2012 (Docket No. 306618), 2012 WL 6913772.

4      Id. at 3.


5      Id. at 3–4. It also determined that the Compact was not a binding contract.


6      Id. at 5. Judge RIORDAN concurred in all respects except regarding the issue of repeal by implication. He
       determined that the panel did not need to conclude that the BTA had impliedly repealed the Compact
       because MCL 208.1309 allowed the taxpayer to petition for another apportionment formula. He concluded
       that the plain language of the BTA required IBM to apportion its income tax consistently with the BTA.

7      IBM v. Dep’t of Treasury, 494 Mich. 874, 832 N.W.2d 388 (2013).


8      Malpass v. Dep’t of Treasury, 494 Mich. 237, 245, 833 N.W.2d 272 (2013).


9      Id.


10     See 1953 PA 150. See also Armco Steel Corp. v. Dep’t of Revenue, 359 Mich. 430, 444, 102 N.W.2d 552
       (1960) (“This tax is part of a general scheme of State taxation of business activities in Michigan. It is a tax
       on Michigan activities measured, in amount, by adjusted receipts derived from or attributable to Michigan
       sources....”).

11     See MCL 206.61, as enacted by 1967 PA 281. The stated purpose of the ITA was “to meet deficiencies in
       state funds by providing for the imposition, levy, computation, collection, assessment, and enforcement by
       lien and otherwise of taxes on or measured by net income activities....” Title, 1967 PA 281.

12     1969 PA 343. Section 1 of 1969 PA 343, codified under MCL 205.581, includes the mandatory provisions
       of the Compact that must be enacted for a state to become a member. See US Steel Corp. v. Multistate
       Tax Comm., 434 U.S. 452, 455–456, 98 S.Ct. 799, 54 L.Ed.2d 682 (1978).

13     U.S. Steel Corp., 434 U.S. at 456, 98 S.Ct. 799.
14   See MCL 205.581, Art. I (“The purposes of this compact are to: (1) Facilitate proper determination of state
     and local tax liability of multistate taxpayers, including the equitable apportionment on tax bases and
     settlement of apportionment disputes[,] (2) Promote uniformity or compatibility in significant components of
     tax systems[,] (3) Facilitate taxpayer convenience and compliance in the filing of tax returns and in other
     phases of tax administration[,] and (4) Avoid duplicative taxation.”).

15   See MCL 208.1 et seq., as enacted by 1975 PA 228.


16   Trinova Corp. v. Dep’t of Treasury, 433 Mich. 141, 149, 445 N.W.2d 428 (1989).


17   See 1975 PA 233.


18   See id.


19   2007 PA 36; MCL 208.1101 et seq.


20   See MCL 208.1201; MCL 208.1203.


21   Enacting section 1 of 2006 PA 325 provides: “The single business tax act, 1975 PA 228, MCL 208.1 to
     208.145, is repealed effective for tax years that begin after December 31, 2007.”

22   See 2011 PA 38.


23   See 2011 PA 39, which reads in part:
        Enacting section 1. The Michigan business tax act, 2007 PA 36, MCL 208.1101 to 208.1601, is
        repealed effective on the date that the secretary of state receives a written notice from the department
        of treasury that the last certificated credit or any carryforward from that certificated credit has been
        claimed.
        Enacting section 2. This amendatory act does not take effect unless House Bill No. 4361 of the 96th
        Legislature is enacted into law.

24   See MCL 205.553, as amended by 1954 PA 17; 1970 CL 206.115; 1979 CL 208.41; MCL 208.1301.


25   Malpass, 494 Mich. at 245–246, 833 N.W.2d 272.


26   This is the principal argument offered by the Department in disallowing use of the Compact’s
     apportionment formula. In the alternative, the Department argues the Compact can be harmonized with the
     BTA by reading the Compact’s election provision and apportionment formula into MCL 208.1309. We
     address this argument in note 55 of this opinion.

27   Wayne Co. Pros. v. Dep’t of Corrections, 451 Mich. 569, 576, 548 N.W.2d 900 (1996). The implied repeal
     doctrine has “remained stable over approximately four centuries of common law in the United Kingdom and
     then here in the United States.” Markham, The Supreme Court’s New Implied Repeal Doctrine: Expanding
     Judicial Power to Rewrite Legislation under the Ballooning Conception of “Plain Repugnancy,” 45 Gonz L.
     Rev 437, 464 (2010). Lord Edward Coke recognized the implied repeal doctrine as far back as 1614. See
     id., p. 456–458 (discussing Lord Coke’s seminal case on the implied repeal doctrine—Doctor Foster’s
     Case, 77 Eng Rep 1222 (KB, 1614)).

28   Wayne Co. Pros., 451 Mich. at 576, 548 N.W.2d 900.
29   Washtenaw Co. Rd. Comm’rs v. Pub. Serv. Comm., 349 Mich. 663, 680, 85 N.W.2d 134 (1957).


30   Wayne Co. Pros., 451 Mich. at 577, 548 N.W.2d 900.


31   Tillotson v. Saginaw, 94 Mich. 240, 244–245, 54 N.W. 162 (1892).


32   Wayne Co. Pros., 451 Mich. at 576–577, 548 N.W.2d 900 (emphasis added; citations and quotation marks
     omitted).

33   Valentine v. Redford Twp. Supervisor, 371 Mich. 138, 144, 123 N.W.2d 227 (1963). As with any issue of
     statutory interpretation, our goal “is to give effect to the Legislature’s intent, focusing first on the statute’s
     plain language.” Malpass, 494 Mich. at 247–248, 833 N.W.2d 272 (citation and quotation marks omitted).

34   Rathbun v. Michigan, 284 Mich. 521, 544, 280 N.W. 35 (1938) (citation and quotation marks omitted).


35   Id. (citation and quotation marks omitted).


36   Id. at 543–544, 280 N.W. 35 (citation and quotation marks omitted).


37   Id. at 543, 280 N.W. 35 (“Statutes in pari materia are those ... which have a common purpose....”).


38   MCL 205.581, Art. IV(9) (“All business income shall be apportioned to this state by multiplying the income
     by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and
     the denominator of which is 3.”).

39   MCL 205.581, Art. III(1).


40   MCL 208.1301.


41   See Fradco v. Dep’t of Treasury, 495 Mich. 104, 114, 845 N.W.2d 81 (2014) (“The Legislature’s use of the
     word ‘shall’ ... indicates a mandatory and imperative directive.”).

42   MCL 208.1301(1).


43   See also People v. Stephan, 241 Mich.App. 482, 497, 616 N.W.2d 188 (2000) (recognizing that interpreting
     the unambiguous language of two conflicting statutes does not end the analysis because “courts do not
     construe individual statutes in a vacuum” but rather construe statutes together under the doctrine of in pari
     materia ).

44   Rathbun, 284 Mich. at 543–544, 280 N.W. 35 (stating further that courts “ ‘will regard all statutes upon the
     same general subject matter as part of one system’ ”) (citation omitted).

45   See MCL 205.552, as amended by 1954 PA 17 (providing that “[t]he adjusted receipts of a taxpayer
     derived from or attributable to Michigan sources shall be determined in accordance with the provisions of
     section 3 of this act”); 1970 CL 206.103 (providing that “[a]ny taxpayer having income from business
     activity which is taxable both within and without this state ... shall allocate and apportion his net income as
     provided in this act”); 1979 CL 208.41 (providing that “[a] taxpayer whose business activities are taxable
     both within and without this state, shall apportion his tax base as provided in this chapter”).

46   See MCL 205.553(b), as amended by 1954 PA 17 (requiring that a taxpayer with adjusted receipts
     attributable to activity within and without Michigan apportion the receipts consistent with a three-factor
     formula); 1970 CL 206.115 (requiring that “[a]ll business income ... shall be apportioned to this state”
     through the standard three-factor apportionment formula); 1979 CL 208.45 (requiring that “[a]ll of the tax
     base ... shall be apportioned to this state” through the three-factor apportionment formula). In 1991, the
     Legislature began to phase out the SBTA’s equally weighted, three-factor apportionment formula, requiring
     a progressively more sales-factor-focused apportionment formula. See MCL 208.45, as amended by 1991
     PA 77. However, the new apportionment formula was still mandatory.

47   MCL 205.581, Art. III(1). See also Black’s Law Dictionary (9th ed) (defining an “election” as “[t]he exercise
     of a choice; esp., the act of choosing from several possible rights or remedies in a way that precludes the
     use of other rights or remedies”).

48   See Moore v. Fennville Pub. Schs. Bd. of Ed., 223 Mich.App. 196, 201, 566 N.W.2d 31 (1997) (“It is the
     duty of the courts to interpret statutes so as to render no provision meaningless.”).

49   Rathbun, 284 Mich. at 543–544, 280 N.W. 35.


50   Although the ITA’s apportionment method is largely consistent with the Compact’s apportionment method,
     caselaw during the period in which both were in effect reflects some potential for inconsistency. See
     Consumers Power Co. v. Dep’t of Treasury, 235 Mich.App. 380, 386 n. 6, 597 N.W.2d 274 (1999)
     (discussing definitional differences between the ITA and the Compact); Chocola v. Dep’t of Treasury, 132
     Mich.App. 820, 831, 348 N.W.2d 290 (1984); Donovan Const. Co. v. Dep’t of Treasury, 126 Mich.App. 11,
     337 N.W.2d 297 (1983).

51   In re Reynolds Estate, 274 Mich. 354, 362, 264 N.W. 399 (1936) ( “The Legislature, in passing [a new act],
     is presumed to have done so with a full knowledge of existing statutes.”).

52   See notes 21 and 23 of this opinion.


53   See Wayne Co. Pros., 451 Mich. at 577, 548 N.W.2d 900.


54   Id. at 576–577, 548 N.W.2d 900.


55   Despite the above framework, the Department argues that if the BTA and the Compact can be harmonized,
     it is only through MCL 208.1309(1), which allows a taxpayer to petition to use another apportionment
     method. We disagree. The Department’s “harmonization” would actually be an abrogation of the election
     provision. Section 309 requires that a taxpayer petition the Department for another apportionment method
     and prove that the BTA’s apportionment provision does not fairly represent the taxpayer’s business activity
     in the state. Thus, the Department’s interpretation takes the choice out of the taxpayer’s hands and is
     inconsistent with the plain language of the Compact. Therefore, we decline to accept the Department’s
     proposed harmonization.

56   See Baxter v. Robertson, 57 Mich. 127, 132, 23 N.W. 711 (1885) ( “Legislative construction of past
     legislation ... is always entitled to be considered with some care, so far as it throws light on doubtful
     language....”).

57   2011 PA 40 (emphasis added).


58   Post at 885.


59   See 1A Singer, Sutherland Statutory Construction (7th ed), § 23:11, p. 485 (“[T]he later express repeal of a
     particular statute may be some indication that the legislature did not previously intend to repeal the statute
     by implication.”).

60   See Jackson v. Mich. Corrections Comm., 313 Mich. 352, 356, 21 N.W.2d 159 (1946).
61   Wayne Co. Pros., 451 Mich. at 576–577, 548 N.W.2d 900 (emphasis added). See also Rathbun, 284 Mich.
     at 544–545, 280 N.W. 35 (If we “can by any fair, strict, or liberal construction find for the two provisions a
     reasonable field of operation, without destroying their evident intent and meaning, preserving the force of
     both, and construing them together in harmony with the whole course of legislation upon the subject, it is
     [our] duty to do so.”) (emphasis added).

62   Wayne Co. Pros., 451 Mich. at 576, 548 N.W.2d 900. See also Matsushita Elec. Indus. Co. v. Epstein, 516
     U.S. 367, 381, 116 S.Ct. 873, 134 L.Ed.2d 6 (1996) (“The rarity with which we have discovered implied
     repeals is due to the relatively stringent standard for such findings, namely, that there be an ‘irreconcilable
     conflict’ between the two federal statutes at issue.”).

63   1A Singer, Sutherland Statutory Construction (7th ed), § 23:10, p. 484, citing Sylk v. United States, 331
     F.Supp. 661, 665 (E.D.Pa., 1971) (“On subjects to which the legislature pays continuous, close attention,
     such as internal revenue laws, the presumption against implied repeal may have greater force.”).

64   Contrary to the dissent’s suggestion, the question is not whether the 2008 Legislature could disregard a
     policy choice by the 1970 Legislature—obviously it could—but instead what action it must take to make its
     intentions clear in the absence of express repealing language in the statute.

65   Valentine, 371 Mich. at 144, 123 N.W.2d 227 (citation omitted).


66   The Department also cannot show that the Legislature intended to occupy the entire field covered by the
     Compact when it enacted the BTA to establish a repeal by implication. Washtenaw Co. Rd. Comm’rs., 349
     Mich. at 680, 85 N.W.2d 134. The BTA and the Compact, while having some overlapping provisions,
     occupy two different fields. The BTA is a stand-alone tax act that governs the taxation of businesses. The
     Compact acts as an overlay to Michigan’s taxation system. It is specifically designed to leave the member
     states with “complete control over all legislation and administrative action affecting the rate of tax, the
     composition of the tax base ..., and the means and methods of determining tax liability and collecting any
     taxes determined to be due.” U.S. Steel Corp., 434 U.S. at 457, 98 S.Ct. 799.

67   Because we are able to harmonize the statutes and conclude that no repeal by implication occurred, we
     decline to discuss whether the Compact is binding and, thus, whether the Legislature even could repeal the
     Compact by implication. That inquiry involves constitutional issues, which we will not reach because they
     are unnecessary to resolve the case. See Booth Newspapers, Inc. v. Univ. of Mich. Bd. of Regents, 444
     Mich. 211, 234, 507 N.W.2d 422 (1993) (“In addition, there exists a general presumption by this Court that
     we will not reach constitutional issues that are not necessary to resolve a case.”).

68   MCL 205.581, Art. III(1).


69   MCL 205.581, Art. II(4). The Compact also defines “gross receipts tax” in Art. II(6) as follows:
       [A] tax, other than a sales tax, which is imposed on or measured by the gross volume of business, in
       terms of gross receipts or in other terms, and in the determination of which no deduction is allowed
       which would constitute the tax an income tax.

70   We need not put a definitive label on the MGRT, a task with which commentators have struggled. See,
     e.g., McIntyre & Pomp, A Policy Analysis of Michigan’s Mislabeled Gross Receipts Tax, 53 Wayne L.Rev
     1283 (2007) (concluding that the MGRT is akin to a sales-subtraction value added tax but that it is not a
     transactional tax); Gandhi, Computing the Tax Base: The Michigan Business Tax, 53 Wayne L.Rev 1369
     (2007) (concluding that the MGRT is a reverse-build of Michigan’s now-repealed Single Business Tax);
     Grob & Roberts, The Michigan Business Tax Replaces the State’s Much–Vilified SBT, 17–Oct J Multistate
     Tax’n & Incentives 8 (2007) (concluding that the MGRT is something between a gross receipts tax and a
     gross margin tax). Instead, we are only tasked with determining whether the MGRT qualifies as an income
     tax under the Compact.

71   MCL 208.1203(3).
72   MCL 208.1111(1).


73   Id.


74   MCL 208.1203(3).


75   MCL 208.1113(6)(a) through (c). “Inventory” is defined as “[t]he stock of goods held for resale in the regular
     course of trade of a retail or wholesale business” and “[f]inished goods, goods in process, and raw
     materials of a manufacturing business purchased from another person.” MCL 208.1111(4)(a) and (b).

76   MCL 208.1113(6)(d) through (g).


77   MCL 208.1203(1).


78   MCL 205.581, Art. II(4).


79   26 U.S.C. § 61.


80   Black’s Law Dictionary (9th ed), p. 831.


81   “Cost of goods sold” is determined by a taxpayer’s inventory. See 33A Am Jur 2d, Federal Taxation, §
     6500 (“A taxpayer must use inventories to determine the cost of goods sold if the production, purchase, or
     sale of merchandise is an income-producing factor.”). See also Thor Power Tool Co. v. Comm’r of Internal
     Revenue, 439 U.S. 522, 530 n. 9, 99 S.Ct. 773, 58 L.Ed.2d 785 (1979); Hygienic Prods. Co. v. Comm’r of
     Internal Revenue, 111 F.2d 330, 331 (C.A.6, 1940).

82   While the Compact does not define the phrase “not specifically and directly related to particular
     transactions,” the use of the words “specifically,” “directly,” and “particular” connotes a close relation to an
     individual transaction. See Random House Webster’s College Dictionary (2001). That is, the tax cannot be
     a tax focusing on specific transactions, i.e., a transactional tax.

83   See 26 U.S.C. §§ 167, 168.


84   MCL 208.1111(4)(a), (b).


85   Our holding is limited to the determination that the MGRT is included within the Compact definition of
     “income tax.” As noted earlier in note 70, we do not need to reach the issue whether the MGRT, generally,
     is an income tax.

1    2011 PA 40.


2    See also 1A Singer, Sutherland Statutory Construction (7th ed.), Repeal and Reenactment, § 23:29.


3    2011 PA 40.


4    1969 PA 343.
5   2011 PA 40.


1   The lead opinion implies that if the Compact is found to irreconcilably conflict with the BTA, the Compact,
    as the earlier enacted statute, will necessarily have been repealed by implication. Our caselaw does not
    demand such a result. See Metro. Life Ins. Co. v. Stoll, 276 Mich. 637, 641, 268 N.W. 763 (1936) (“It is the
    rule that where two laws in pari materia are in irreconcilable conflict, the one last enacted will control or be
    regarded as an exception to or qualification of the prior statute.”) In any event, regardless of whether the
    BTA impliedly repealed the Compact beginning January 1, 2008, the issue remains the same—whether the
    Compact election was available for tax years 2008 through 2010.

2   Taxpayers may petition the Treasury to use an alternative apportionment method if the apportionment
    provisions of the BTA “do not fairly represent the extent of the taxpayer’s business activity in this state[.]”
    MCL 208.1309(1).

3   I agree with the lead opinion that the tax bases at issue here are “income taxes” within the meaning of the
    Compact. MCL 205.581, Art. II(4).

4   To the extent that IBM is separately arguing that the Compact is a binding contract among its member
    states and that unilateral amendment of the Compact offends the Contract Clause, that argument is
    discussed later in this opinion.
      The California First District Court of Appeal recently decided this very issue in Gillette Co. v. Franchise
      Tax Bd., 209 Cal.App.4th 938, 147 Cal.Rptr.3d 603 (2012), review granted and opinion superseded sub
      nom Gillette v. Franchise Tax Bd., 151 Cal.Rptr.3d 106, 291 P.3d 327 (2013). The Gillette Court held that
      “under established compact law, the [Multistate Tax] Compact superseded subsequent conflicting state
      law ... [and] the federal and state Constitutions prohibit states from passing laws that impair the
      obligations of contracts.” Gillette, 147 Cal.Rptr.3d at 615. For the reasons stated herein, I believe that
      Gillette was wrongly decided.

5   While the Treasury has not made the argument in its brief on appeal, it is not entirely clear to me why IBM
    has standing to enforce the Compact as a contract, given that IBM is neither a party to the Compact nor is
    it clear that they were intended as a third-party beneficiary. See Schmalfeldt v. North Pointe Ins. Co., 469
    Mich. 422, 670 N.W.2d 651 (2003); MCL 600.1405. In any event, because I conclude that no such
    contractual relationship was formed, I find it unnecessary to address this issue sua sponte.

6   Michigan law recognizes a similar principle. See Klapp v. United Ins. Group Agency, Inc., 468 Mich. 459,
    478–479, 663 N.W.2d 447 (2003).

7   It bears emphasizing that Compact members have not only refrained from bringing legal action against one
    another for deviating from Articles III and IV, they have endorsed the Commissioner’s interpretation of the
    Compact: in the Gillette litigation, all of the member states jointly filed an amicus brief urging the Supreme
    Court of California to reject the lower court’s construction of the Compact as a binding contract.

8   In arguing that unilateral amendment of the Compact would offend the state and federal constitutions, IBM
    cites Green, 21 U.S. 1, in which the Supreme Court analyzed an interstate compact under the Contract
    Clause, U.S. Const., art. I, § 10, cl. 1. While I conclude that the Compact did not create a contractual
    obligation that precluded Michigan from unilaterally amending its election provision, it is important to note
    that the Supreme Court has since retreated from the “any deviation” standard it applied in Green. See US
    Trust Co. v. New Jersey, 431 U.S. 1, 21, 97 S.Ct. 1505, 52 L.Ed.2d 92 (1977). Because IBM does not
    engage these post-Green developments, it has failed to explain how a constitutional violation arises under
    a modern analysis.
              Tab 8
  H. Alan Rosenberg v. Douglas J.
Macginnittie, Commissioner, Georgia
Department of Revenue, No. 1414626
        (GA Nov. 25, 2014)
                                                                                   FILED
                        BEFORE THE GEORGIA TAX TRIBUNAL                       GA. TAX TRIBUNAl.
                                STATE OF GEORGIA
                                                                             NOV 25 2014
H. ALAN ROSENBERG,
                                                                                        -$~
                                                                             Yvonne Bouras
              Petitioner,                                               Tax Tribunal Administrator
v.                                                  TAX TRIBUNAL DOCKET
                                                    NO.: TAX-IIT-1414626
DOUGLAS J. MACGINNITTIE,
Commissioner, Georgia Department of
Revenue,

              Respondent.

                                          DECISION

                       2014-15 Ga. Tax Tribunal, November 25,2014



                                  I.      INTRODUCTION

       This case presents the important question of whether a Georgia taxpayer who receives

pass-through income from an entity that was taxed in Texas under Sections 171.0001 .. 171.909 of

the Texas Tax Code (the "Texas Franchise Tax") is entitled to utilize the relief provisions of

O.C.G.A. § 48-7-27(d)(l)(C) in computing that taxpayer's taxable Georgia income because the

Texas Franchise Tax is a tax "on or measured by income."

       As discussed below, the plain language of the statute, the policy underlying its enactment,

the applicable rules of statutory construction, and the substantial weight of judicial,

administrative and financial authority both in Georgia and other jurisdictions lead ineluctably to

the conclusion that the Texas Franchise Tax is indeed a tax "measured on or with respect to

income" for purposes of O.C.G.A. § 48-7-27(d)(l)(C).            Petitioner H. Alan Rosenberg

("Petitioner" or the "Taxpayer") is therefore entitled to the benefit of these relief provisions.




                                                                                                     1079
Accordingly, the Petitioner's Motion for Summary Judgment on this issue in this case ts

GRANTED and Respondent's Motion for Summary Judgment is DENIED.

                                II.     FINDINGS OF FACT

       The parties have entered into a stipulation of facts pursuant to Ga. Comp. R. & Regs.

616-1-3-.18 as adopted in Standing Order dated June 1, 2013, and the facts are not in dispute.

A.     Petitioner's ownership interests in multi-tiered partnerships.

       Petitioner, H. Alan Rosenberg, was a resident of the state of Georgia during 2008 and

filed a Georgia income tax return for that tax year. During 2008, Petitioner was the owner of

membership interests in NDC Leasing, LLC ("NDC Leasing"), a limited liability company

organized under Georgia law that is treated as a partnership for federal and Georgia income tax

purposes.   During 2008, Petitioner was also the owner of membership interests in National

Distributing Company, Inc. ("National Distributing"), a corporation organized under Georgia

law that is treated as an S Corporation for federal and Georgia income tax purposes.

       NDC Leasing and National Distributing, through their direct and indirect ownership of

various partnerships, LLCs, and other pass-through entities, are wholesalers and distributors of

alcoholic beverages. As a requirement of conducting that business, they (or the entities in which

they hold interests) possess licenses to distribute and/or sell alcohol in a number of states,

including but not limited to Georgia and Texas.

       During 2008, in addition to other sources of income, Petitioner reported pass-through

income as a result of his interests in NDC Leasing and National Distributing.

       During 2008, NDC Leasing and National Distributing owned interests in NDC Partners,

LLC ("NDC Partners"). During 2008, NDC Partners was in turn the owner of membership

interests in Republic National Distributing Company, LLC ("RNDC"), which operated in Texas



                                                  2

                                                                                                    1080
during 2008.      RNDC was the reporting entity on a 2009 Texas Franchise Tax Report that

included RNDC and a number of its affiliates.                 The accounting period for the 2009 Texas

Franchise Tax Report filed by RNDC was based on the 2008 calendar year.

        In determining its "taxable margin" for purposes of computing the Texas Franchise Tax,

RNDC used the "cost of goods sold" deduction provided for in Tex. Tax Code Ann.

§ 171.101(a)(l)(B)(ii)(a).

B.      Petitioner's original Georgia individual income tax return.

        On his 'original 2008 Georgia income tax return, in addition to other sources of income,

Petitioner included his distributive shares of the income of NDC Leasing and National

Distributing. Therefore, through his indirect interests in RNDC, Petitioner reported an amount to

Georgia (greater than one dollar) during 2008 that was subject to Texas Franchise Tax. 1

        With the distributive shares of income from NDC Leasing and National Distributing

included in his Georgia income, Petitioner's originally-reported 2008 Georgia taxable net income

was $1,317,585, and Petitioner reported total Georgia income tax liability of $78,795 for tax year

2008.

        On his original 2008 income tax return, Petitioner did not make any adjustments related

to the payment of Texas Franchise Tax by RNDC.

        Petitioner did not file a tax return or pay personal income taxes to Texas during 2008 or

any other year.




1
  The parties have stipulated that at least one dollar of income from RNDC indirectly flowed through to Petitioner
through his direct interests in National Distributing and NDC Leasing. The parties have so far been unable to agree
on the exact amount due to the complex nature of the tiered partnership ownership structure and the resulting
complex calculations. It is not necessary to resolve the amount of the refund that is due in order to resolve whether
the Taxpayer is entitled to summary judgment on the legal issue in this case, which is the subject of this motion.

                                                         3

                                                                                                                        1081
C.      Petitioner's request for ruling and the Department of Revenue's response.

        On May 1, 2012, NDC Leasing and National Distributing filed a request with the Georgia

Department of Revenue (the "Department") for a letter ruling concerning the application of

O.C.G.A. § 48-7-27(d)(1) to the Texas Franchise Tax. In a letter dated July 13, 2012, the

Department denied the ruling request, stating in part that because Georgia does not consider the

Texas Franchise Tax to be an "income tax," individuals cannot subtract pass-through amounts

that were taxed by Texas.

D.      Petitioner's amended 2008 Georgia income tax return (claim for refund).

        In an amended return dated September 12, 2012, Petitioner changed his Georgia taxable

net income from $1,317,585 to $857,302 and claimed a total tax refund in the amount of

$41,293, plus statutory interest. The adjustments that Petitioner claimed pursuant to O.C.G.A.

§ 48-7-27(d)(1) yielded a refund claim in the amount of$27,617 for tax year 2008. A portion of

the adjustments under O.C.G.A. § 48-7-27(d)(1) derived from the franchise taxes paid by RNDC

to Texas. The remainder of those adjustments derived from taxes paid by RNDC to the District

of Columbia.

        The income tax credits that Petitioner claimed on his amended 2008 Georgia income tax

return yielded a refund claim in the amount of $13,676 for tax year 2008. Those income tax

credits stemmed from an amended Georgia income tax return filed by National Distributing to

claim Georgia jobs tax credits that National Distributing did not claim on its original Georgia

income tax return for the 2008 year?

        In a letter dated September 12, 2013, the Department denied Petitioner's claim for refund.



2
  The Petitioner has not sought summary judgment with respect to either (i) the District of Columbia adjustment or
(ii) the Georgia income tax credits that were claimed. These amounts are still at issue and the parties continue to
negotiate as to possible resolution of these issues.

                                                        4

                                                                                                                      1082
E.     Petitioner's case in the Tax Tribunal.

       In response to the bepartment's denial of Petitioner's claim for refund, Petitioner filed

his Petition in this matter with the Tribunal on October 17, 2013. Under the Amended Consent

Scheduling Order entered in this case, Petitioner filed Petitioner's Motion for Summary

Judgment, ("Petitioner's Summary Judgment Motion"), Petitioner's Statement of Theory of

Relief and Joint Stipulation of Facts ("Joint Stipulation"), Brief in Support of Motion for

Summary Judgment ("Petitioner's Summary Judgment Brief'), and Petitioner's Motion for Oral

Argument on June 27, 2104, moving for partial summary judgment on the issue for decision now

before us.   In response, Respondent filed Respondent's Motion for Summary Judgment

("Respondent's Cross-Motion for Summary Judgment"), Brief in Support of Respondent's

Cross-Motion    for   Summary       Judgment   ("Respondent's    Summary      Judgment   Brief'),

Respondent's Theory of Recovery, and Respondent's Motion for Oral Argument. In response,

Petitioner filed his Reply Brief ("Petitioner's Reply Brief') on August 15, 2014.

       Oral argument on Petitioner's Motion for Summary Judgment and Respondent's Cross-

Motion for Summary Judgment was held on October 3, 2014. In response to requests from the

Tribunal, Petitioner submitted supplemental information electronically on October 16, 2014.

                             III.      CONCLUSIONS OF LAW

A.     Jurisdiction and venue.

       The parties have stipulated that the Tribunal has jurisdiction over this appeal from the

Department's denial of a claim for refund of income taxes pursuant to O.C.G.A. §§ 48-2-35(a)(4)

and 50-13A-9(a) and that venue is proper before the Tribunal pursuant to O.C.G.A. § 48-2-

35(a)(4).




                                                5

                                                                                                    1083
B.     Standard of review on summarv judgment.

       The standards governing summary judgment are well established. To prevail at summary

judgment under O.C.G.A. § 9-11-56, the moving party must demonstrate that there is no genuine

issue of material fact as to each element of its claim and that the undisputed facts, viewed in the

light most favorable to the nonmoving party, warrant judgment as a matter of law. O.C.G.A.

§ 9-11-56(c); Lau's Corp .. Inc. v. Haskins, 261 Ga. 491 (1991). Proceedings before the Tribunal

are de novo in nature, and the evidence on the issues in a hearing before the Tribunal is not

limited to the evidence presented to or considered by the Department prior to the Department's

decision. O.C.G.A. § 50-BA-14; see Ga. Comp. R. & Regs. 616-1-3-.11 as adopted in Standing

Order dated June 1, 2013.

C.     Flow-through entity taxation.

       In approaching the issue in this case it is important to understand the context in which the

Georgia General Assembly enacted the legislation which is at issue. This case must therefore be

understood in the broader context oftaxation of flow-through entities in a multi-state context.

       The taxation of partnerships, S corporations and other forms of "flow-through" entities

on a multistate basis has long been a complex and unsettled area. See,        ~.    American Bar

Association Subcommittee on State Taxation of S Corporations, Report of the Subcommittee on

State Taxation of S Corporations: Model S Corporation Income Tax Act and Commentary, 42

The Tax Lawyer 1001 (1989); Multistate Tax Commission, The Multistate Tax Commission

"Working Draft" of a Proposed Model Rule for a Partnership Composite Tax Return Applicable

to Multijurisdictional Partnerships, 3 State Tax Notes 810 (1992); Carolyn Joy Lee, Bruce P. Ely

and Dennis Rimkunas, State Taxation of Partnerships and LLCs and their Members. Journal of

Multistate Taxation and Incentives, Volume 19, Number 10, February 2010. The issues that



                                                 6

                                                                                                      1084
arise when multiple states seek to tax the income of business enterprises conducted through flow-

through entities are particularly complex. 3

        A flow-through entity is best understood as an entity that is not taxed as a corporation.

Under Subchapter C of the Internal Revenue Code, an entity taxed as a corporation (a "C

corporation") is taxed on its income as a separate entity, separate and distinct from its owners. It

is subject to double taxation first on its earnings at the entity level (currently taxed up to a

maximum rate of 39.6 percent for federal income tax purposes plus applicable state income

taxes) and then a second time again to the shareholders (currently up to a maximum rate of 39.6

percent for individuals plus applicable state income taxes) when distributed to them.                             See

generally, Corporations, Internal Revenue Service, http://www.irs.gov/Businesses/Small-

Businesses-&-Self-Employed/Corporations.

        By contrast with the C corporation double-tax paradigm, a flow-through entity computes

taxable income derived by the enterprise at the entity level, but does not itself pay tax on that

mcome.      Rather, it is the entity's owners who pay the tax. As a consequence, such earnings are

taxed only once- to the flow-through entity's owners.

        The most frequently seen forms of flow-through entities are entities taxed as partnerships,

corporations which have elected S corporation status, and single member LLCs which are



3
   Over the last twenty-five years, these issues have assumed ever greater importance for taxpayers and state tax
authorities as a result of the proliferation of additional forms of flow-through entities, including Subchapter "S"
corporations, limited liability companies ("LLCs"), limited liability partnerships ("LLPs"), limited liability limited
partnerships ("LLLPs"), qualified Subchapter S subsidiaries ("QSSSs"), single member limited liability companies
that are disregarded for income tax purposes ("SMLLCs") and, most recently, so called "series" limited liability
companies. Indeed, since the adoption ofthe federal "check-the-box regulations" and the rise of the limited liability
company as a preferred form of business entity, the number of business enterprises organized as flow-through
entities for tax purposes continues to increase while the number of entities taxed as traditional "C" corporations is
declining steadily. Looking at the federal statistics in this area is enlightening. See Staff of the Joint Committee on
Taxation, Selected Issues Relating to Choice of Business Entity (July 27, 2012),
https://www.jct.gov/publications.html?func=startdown&id=4478.



                                                          7

                                                                                                                          1085
disregarded for federal income tax purposes. 4                 Such entities are all generally referred to as

"flow-through" entities for federal income tax purposes although each has a distinct tax regime. 5

D.       Flow-through tax treatment for state tax purposes.

         The analysis becomes more complex as we move to the taxation of such entities by the

several states.

        It is quite possible and quite common for two different states to tax the same income. As

the Maryland Court of Appeals recently noted in Maryland State Comptroller of the Treasury v.

Wynne, et ux., 431 Md. 147, 155 (2013), cert. granted, 134 S. Ct. 2660 (2014),

        A state may tax the income of its residents, regardless of where that income is earned. A
        state may also tax a nonresident on income earned within the state. Both of these
        propositions are consistent with the Due Process Cause of the Fourteenth Amendment.
        Oklahoma Tax Comm's v Chickasaw Nation, 515 U.S. 450,462-63 & n.ll (1995); New
        York ex rel. Cohn v. Graves, 300 U.S, 312-13 (1937). However, they raise the possibility
        of what might be termed "double taxation" when both the state of the taxpayer's
        residence and the state where the income was generated tax the same income.

         To ameliorate this harsh result, many states allow credits or adjustments to the

computation of their income to ameliorate the resulting double-tax.                        As to individuals, for

4
    Under the check-the-box regulations, a non-corporate entity with at least two members is classified as a
partnership unless it elects to be taxed as an association taxable as a corporation. Treas. Reg. §§ 301.7701-2(c)(l),
301.7701-3(a), 301.7701-3(b)(l)(i). An S corporation is a domestic corporation which satisfies the requirements of
I.R.C. § 1361 and as to which its shareholders have made the election required by I.R.C. § 1362 on Form 2553.
Finally, under the check-the-box regulations, a single member non-corporate business entity (most frequently a
limited liability company) is disregarded for tax purposes and treated as an extension of its owner for all income tax
purposes unless the entity elects to be classified as an association. Treas. Reg. §§ 301.7701-2(c)(2), 301.7701-3(a),
301.7701-3(b)(l)(ii).
5
   Entities taxed as partnerships are taxed under Subchapter K of the Internal Revenue Code while Subchapter S
corporations are cleverly so named because they are taxed under Subchapter S. It is often said that partnerships and
S corporations are taxed alike, but, like all generalizations, this one is misleading as there are extremely significant
differences in the tax rules that apply to these two types of entities. For income tax purposes, disregarded entities
are just that (except for employment tax purposes), but they are generally not disregarded for non-income tax
purposes, e.g., sales and use taxes.
There are a number of other more exotic forms of flow-through or quasi flow-through entities including Regulated
Investment Companies ("RICs"), I.R.C. § 852, Real Estate Investment Trusts ("REITs"), I.R.C. §857, Real Estate
Mortgage Investment Conduits ("REMICs"), I.R.C. § 860A, Qualified REIT Subsidiaries ("QRSs"), I.R.C. § 856,
Qualified Subchapter S Subsidiaries, ("QSSSs"), I.R.C. § 1361(b)(3)(A), and so called "Series LLCs" (Prop. Treas.
Reg.§§ 301.6011-6,301.6071-2, 301.7701-1(a)(S)). Each ofthese has its own separate tax regime and none is at
issue in this case.

                                                           8

                                                                                                                           1086
instance, Georgia provides a credit for taxes paid m foreign states on the same income.

O.C.G.A. § 48-7-28. 6

         So for state income tax purposes, flow-through tax treatment works well when the entity,

its owners, and all income earned are located within one taxing jurisdiction.                                 In such

circumstances, there is only one sovereign and only one tax imposed. But when a flow-through

entity has business activities, income and owners located in multiple states, the complexities of

compliance and the potential for owners of the entity to pay tax on the same income in multiple

jurisdictions mounts quickly.           O.C.G.A § 48-7-30(b); Form IT-711, Instructions to Georgia

Partnership Tax Return.

         A related, but slightly different issue arises when an entity that is recognized as a flow-

through in one state engages in business in a state which does not recognize flow-through

treatment.     While it is true that as a broad working generalization and subject to various

exceptions, most states follow the federal classification of an entity for tax purposes, 7 some states

treat flow-through entities as separate taxpayers and impose various entity level taxes on such

flow-through entities. 8       These include Texas and Tennessee (neither of which imposes an

individual income tax) as well as a number of other jurisdictions. See Ely Chart.


6
  The degree to which one state is constitutionally required to give credits for taxes on multistate income has long
been a subject of scholarly debate. The decision of the Maryland Court of Appeals on this issue in ~ has
generated great interest and is currently pending before the United States Supreme Court on writ of certiorari. See
Comptroller of the Treasury of Maryland v. Wynne, 134 S. Ct. 2600 (2014).
7
   Thus, for example, if an entity organized as a limited liability company in Georgia is taxed as a partnership for
federal income tax purposes, Georgia will likewise tax the entity as a partnership for Georgia income tax purposes.
O.C.G.A § 14-11-1104.
8
   In the area of state taxation of limited liability companies and limited liability partnerships, for many years, Bruce
Ely and his cohorts have performed an invaluable service by annually publishing updated charts summarizing the
State Tax Treatment of Limited Liability Companies and Limited Liability Partnerships. These charts summarize
federaVstate conformity/non-conformity on tax treatment of LLCs and LLPs as well as identifying other state taxes
and fees that may apply. ~Bruce P. Ely, Christopher R. Grissom, William T. Thistle II, and J. Sims Rhyne, An
Update of the State Tax Treatment of LLCs and LLPs. State Tax Notes (February 3, 2014), cited as "Ely Chart"
elsewhere in this decision.

                                                           9

                                                                                                                            1087
                                                                                                            ---   ---------




E.      The adjustment to taxable income provided under O.C.G.A. § 48-7-27(d}(ll(C).

        The Georgia General Assembly enacted O.C.G.A. § 48-7-27(d)(l)(C) to address just this

latter issue.   The language of this adjustment provision, which is at the core of this case,

provides:

        A Georgia individual resident who is a partner in a partnership, who is a member
        of a limited liability company taxed as a partnership, or who is a single member of
        a limited liability company which is disregarded for federal income tax purposes
        may make an adjustment to federal adjusted gross income for the entity's income
        taxed in another state which imposes on the entity a tax on or measured by
        income.

O.C.G.A. § 48-7-27(d)(l)(C) (emphasis added).

        Under this relief provision, Georgia taxpayers will not be subjected to double taxation

with respect to income from flow-through entities where such income is subject to taxation in

another state because that state chooses to tax such income directly at the entity, rather than the

owner, level. This provision permits the affected Georgia taxpayer to make an "adjustment" to

the taxpayer's Federal Adjusted Gross Income in computing the taxpayer's Georgia taxable

income for income flowing out to that taxpayer from a flow through entity that has also been

subject to tax "on or measured by income" in another state. 9




Many states, such as Georgia, impose additional requirements to recognize flow-through treatment for S
corporations. ~ O.C.G.A § 48-27(d)(2).
9
  O.C.G.A. § 48-7-27(d)(l)(C) utilizes an "adjustment" mechanism to avoid double taxation at the state level on the
same income. This is the same approach adopted by the legislature in O.C.G.A. § 48-7-27(d)(l)(B) with respect to
S corporations which are recognized as S corporations for tax purposes in Georgia but not in another state.
This adjustment approach is not the only possible solution to address the issue of taxation of the same income by
two states, however. Alternatively, the legislature could have adopted a credit mechanism similar to that contained
at O.C.G.A. § 48-7-28, which is how the issue is addressed for individuals. In the analogous area of double taxation
of the same income by both the US and a foreign nation, the Internal Revenue Code adopts the "credit" approach to
addressing the issue in the Foreign Tax Credit provisions of the Internal Revenue Code, I.R.C. §§ 901-906,
http://www.irs.gov/taxtopics/tc856.html.
Each system ("adjustment" vs. "credit") has weaknesses, strengths and computational complexities arising from
attempting to harmonize what, are by definition, different tax systems.

                                                        10

                                                                                                                       1088
       Respondent has acknowledged that the provisions of O.C.G.A. § 48-7-27(d)(l)(C) apply

to Georgia taxpayers who own interests in entities which conduct business in Tennessee through

flow-through entities because Tennessee imposes its excise tax on flow-through entities that

provide limited liability, such as LLCs, LLPs, and S corporations, at the rate of 6.5 percent of net

income. Tenn. Code Ann. § 67-4-2007(a). The question presented in this case is whether the

Texas Franchise Tax is a tax "on or measured by income" that should receive similar treatment.

       The parties have stipulated that Petitioner was a resident of the state of Georgia during

2008 and filed a Georgia income tax return for that tax year. On that 2008 return, in addition to

other sources of income, Petitioner reported pass-through income as a result of his interests in

NDC Leasing and National Distributing. In turn, NDC Leasing and National Distributing (an

LLC and an S corporation, respectively) owned indirect membership interests in RNDC, an LLC

that operated in Texas during 2008 and paid Texas Franchise Taxes for that year. Therefore, the

parties agree in this case that, through his indirect interests in RNDC, Petitioner reported an

amount to Georgia (greater than one dollar) during 2008 that was subject to Texas Franchise

Tax.

       Because it is undisputed Petitioner received pass-through income from an entity that was

taxed in Texas, if the Texas Franchise Tax on those entities is a tax "on or measured by income"

the Petitioner in entitled to an adjustment from his federal adjusted gross income under O.C.G.A.

§ 48-7-27(d)(l)(C). The Petitioner's position is that the Texas Franchise Tax is indeed such a

tax.

       Respondent's position is that the Texas Franchise Tax is not a "tax on or measured by

income." Respondent argues that the Texas Franchise Tax is instead a privilege tax or a gross-

receipts tax and operates in a fundamentally different manner than an income tax. Because under



                                                 11

                                                                                                       1089
Respondent's analysis, the Texas Franchise Tax is not an income tax or measured by income as

determined by long accepted principles, it cannot serve as a basis for an adjustment pursuant to

O.C.G.A. § 48-7-27(d)(l).

       To resolve this question, it is first necessary to define the meaning of "income" for

purposes ofthe phrase "on or measured by income" contained in O.C.G.A. § 48-7-27(d)(l)(C).

F.     Georgia law imposes income tax on an individual's "Georgia taxable net income.:'
       which is an individual's "federal adjusted gross income" as adjusted.

       In defining an individual's "Georgia taxable net income," O.C.G.A. § 48-7-27(a)

provides that it consists of the individual's "federal adjusted gross income, as defined in the

United States Internal Revenue Code of 1986," subject to a number of prescribed adjustments.

Those adjustments include, inter alia, a deduction for either the individual's itemized

nonbusiness deductions or a standard deduction; an exclusion for certain amounts of retirement

income; and a number of other specified deductions and additions involving specified types of

income (e.g., deductions for certain military or disability income). See generally O.C.G.A. § 48-

7-27(a)-(b).

       The adjustment provision at issue in this case-O.C.G.A. § 48-7-27(d)(l)(C)-cannot be

interpreted in isolation, but instead must be considered in connection with all of the related

adjustment provisions and related terms of art that appear throughout the Georgia Tax Code (and

especially in Code Sections 48-7-21 and 48-7-27).      See,~.   Tew v. State, 320 Ga. App. 127, 130

(2013) ("[A] statute must be construed in relation to other statutes of which it is a part, and all

statutes relating to the same subject matter, briefly called statutes in pari materia ....").

       It is crucial that, like O.C.G.A. § 48-7-27(d)(l)(C), other statutory adjustment provisions

located throughout O.C.G.A. § 48-7-27 also include numerous explicit references to terms of




                                                  12

                                                                                                      1090
art-including "gross income," "taxable income," "net income," and "income taxes." 10

Similarly, the statute which provides for the computation of a corporation's "Georgia taxable net

income" also includes a number of adjustment provisions which use terms of art involving the

word "income." See generally O.C.G.A. § 48-7-21.U



10
     These provisions include, but are not limited to:
      • A provision stating, in describing the amount of retirement income that an individual may exclude, that
          "[e]arned income in excess of $4,000.00, including but not limited to net business income earned by an
          individual from any trade or business ... shall not be regarded as retirement income." (O.C.G.A. § 48-7-
          27(a)(5)(E)) (emphasis added);
      • A provision stating: "The commissioner shall by regulation provide that ... penalty and interest may be
          waived or reduced for any taxpayer whose estimated tax payments and tax withholdings are less than 70
          percent of such taxpayer's Georgia income tax liability if the commissioner determines that such
          underpayment or deficiency is due to an increase in net taxable income attributable directly to amendments
          to this paragraph .... " (O.C.G.A. § 48-7-27(a)(5)(G)) (emphasis added);
      • A provision stating that "[s]ocial security benefits and tier 1 railroad retirement benefits, to the extent
           included infederal taxable income," may be subtracted. (O.C.G.A. § 48-7-27(a)(7)) (emphasis added);
      • A provision stating that there shall be added to "taxable income" any "[d]ividend or interest income, to the
          extent that the dividend or interest income is not included in gross income for federal income tax
          purposes," on obligations of any state except Georgia or its subdivisions. (O.C.G.A. § 48-7-27(b)(l)(A))
           (emphasis added);
      • A provision stating that there shall be added to "taxable income" any "[i]nterest or dividends on obligations
           of the United States" or its subdivisions "which by the laws of the United States are exempt from federal
           income taxes but not from state income taxes." (O.C.G.A. § 48-7-27(b)(l)(B)) (emphasis added); and
      • A provision stating that "[t]here shall be added to taxable income any income taxes imposed by any tax
          jurisdiction except the State of Georgia to the extent deducted in determining federal taxable income."
           O.C.G.A. § 48-7-27(b)(3) (emphasis added).
11
     These provisions include, but are not limited to:
      • A provision stating, "When interest income is derived from obligations of any state or political subdivision
          except this state and political subdivisions of this state, the interest income shall be added to taxable income
          to the extent that the interest income is not included in gross income for federal income tax purposes."
          (O.C.G.A. § 48-7-21(b)(l)(A)) (emphasis added);
      • "There shall be subtracted from taxable income interest or dividends on obligations of the United States ...
          to the extent such interest or dividends are includable in gross income for federal income tax purposes but
          exempt from state income taxes under the laws of the United States." (O.C.G.A. § 48-7-2l(b)(l)(B))
          (emphasis added);
      • "There shall be added to taxable income any taxes on, or measured by, net income or net profits paid or
          accrued within the taxable year imposed by the authority of the United States or ... by any state except the
          State of Georgia . . . to the extent such taxes are deducted in determining federal taxable income."
          (O.C.G.A. § 48-7-21(b)(2)) (emphasis added); and
      • "No portion of any deductions or losses which occurred in a year in which the taxpayer was not subject to
          taxation in this state including, but not limited to, net operating losses may be deducted in any tax year.
          When the federal adjusted gross income or net income of a corporation includes such deductions or losses,
          an adjustment deleting them shall be made under rules established by the commissioner." O.C.G.A. § 48-7-
          2l(b)(3) (emphasis added).



                                                            13

                                                                                                                             1091
        In contrast to the other adjustment provisions in O.C.G.A. §§ 48-7-21 and 48-7-27 which

turn on the application of terms of art including "net income," "taxable income," "federal taxable

income," or "income taxes," O.C.G.A. § 48-7-27(d)(1)(C) provides an adjustment to an

individual whenever the individual receives pass-through income that has been subject to tax "on

or measured by income." Therefore, to interpret the "on or measured by income" language that

is at the core of this case, it is essential not only to look to the statutory and historical definitions

of "income," but also to interpret the phrase in harmony with the related terms of art that appear

throughout the Georgia Tax Code.

       As the Georgia Court of Appeals explained in the context of interpreting the meaning of

the phrase "income tax" in Chilivis v. Int'l Bus. Mach. Corp., 142 Ga. App. 160, 161 (1977), the

state's General Assembly "must be assumed to have understood the technical meaning" of those

numerous terms of art when it enacted the various adjustment provisions. So one must approach

the statute mindful of both this rule and the rule that a statute must be construed "in pari

materia" to harmonize all of its parts, "whenever possible."

G.      The Texas Franchise Tax as a tax "on or measured by income."

        1. "Income" for tax purposes means all sources of gain, generally without regard to
            expenses or other deductions.

        Whether the Texas Franchise Tax is a tax "on or measured by income" for purposes of

O.C.G.A. § 48-7-27(d)(l)(C) depends on the fundamental question of what "income" means

under the statute. Neither the Georgia Tax Code nor the Internal Revenue Code specifically

defines the term "income." Courts and scholars have long struggled to define the term. For

example, writing in the Connecticut Law Review regarding the proper income tax treatment of

gifts, one scholar wrote:




                                                   14

                                                                                                            1092
       Determining the constitutional meaning of income is difficult since the
       [Sixteenth] Amendment nowhere defines the term. The current debate on the
       proper method of constitutional analysis has not focused on the Sixteenth
       Amendment, nor has the Supreme Court examined the issue recently. The Court's
       earlier pronouncements, which began in the 1920's, interpreted the term very
       strictly, limiting it to its plain or ordinary meaning, whatever that may be. 12

       One of the seminal authorities on this issue is the U.S. Supreme Court's decision in

Eisner v. Macomber, 252 U.S. 189 (1920). Seeking to define "income" for purposes of the

Sixteenth Amendment, after examining dictionary definitions and the intent of the amendment,

the Court concluded: "Income may be defined as the gain derived from capital, from labor, or

from both combined . . . ." Id. at 207 (quoting Doyle v. Mitchell Bros., 24 7 U.S. 179, 18 5

(1918)). The Court added that the gain must be realized (i.e., "separated" from the capital), and

recited the Sixteenth Amendment's language that such realized gain is income, "from whatever

source [it is] derived." Id. at 207. Notably, the U.S. Supreme Court in Macomber did not define

"income" with reference to any expenses or deductions.

        While Georgia courts have rarely considered the meaning of the term "income," the

Georgia Court of Appeals used a definition nearly identical to the broad definition contained in

Macomber in its 1936 decision in Brandon v. State Revenue Comm'n, 186 S.E. 872 (Ga. Ct.

App. 1936). There, the court examined the nature of an income tax and defined "income" as

follows:

        Whatever may be the strict or technical meaning of income, for tax purposes the
        term means an actual gain or an actual increase in wealth, and does not include a
        mere unrealized increase in value. Accordingly, as a subject of taxation, income
        is the gain derived from capital or labor, or both combined ....

Id. at 873; see also City of Fitzgerald v. Newcomer, 162 Ga. App. 646, 648 (1982) (noting as

part of interpreting a contract: "It is undoubtedly true that 'profits' and 'income' are sometimes
                                            \
12
   Marjorie Kornhauser, The Constitutional Meaning of Income and the Income Taxation of Gifts, 25 Conn. L. Rev.
1, 2 (1992).

                                                      15

                                                                                                                  1093
used as synonymous terms; but, strictly speaking, 'income' means that which comes in or is

received from any business, or investment of capital, without reference to the outgoing

expenditures . ...")(emphasis added).

       More recently, the New Jersey Supreme Court also relied on Macomber to determine

whether a federal "windfall profits tax" was a tax measured by income for purposes of that

state's adjustment provision. See Amerada Hess Corp. v. Dir., Div. of Taxation, 526 A.2d 1029,

1042-44 (N.J. 1987), affd., 490 U.S. 66 (1989). That court concluded that the federal tax was a

tax on income:

       Under ordinary dictionary definitions of "income," i.e., all that comes in without
       regard to expenditures, the windfall profit clearly constitutes "income." The
       windfall profit also meets a more restrictive definition, i.e., gross receipts less
       costs of goods sold.

ld. at 1042 (emphasis added). Black's Law Dictionary similarly defines the term "income" to

mean "the money or other form of payments that one receives, usually periodically, from

employment, business, investments, royalties, gifts, and the like"-again making no reference to

any expenses or deductions. Black's Law Dictionary (9th ed. 2009).

       Based on the consistent interpretations of the term "income" over the years in Macomber,

Brandon, and Amerada Hess, and the similar definition in Black's Law Dictionary, for tax

purposes, the term "income" means all amounts that come in, without regard to expenditures.

       While the Internal Revenue Code does not itself define the term "income," it equates

"income" with "gross income" by defining "gross income" to mean ''all income from whatever

source derived, including (but not limited to) the following items:

                 (1)   compensation for services ... ;

                 (2)   gross income derived from business;

                 (3)   gains derived from dealings in property;


                                                16

                                                                                                  1094
              (4)      interest;

               (5)     rents;

              (6)      royalties;

              (7)      dividends;

              (8)      alimony and separate maintenance payments;

               (9)     annuities;

               (1 0)   income from life insurance ... contracts;

               (11)    pensions;

               (12)    income from discharge of indebtedness;

               (13)    distributive share of partnership income;

               ( 14)   income in respect of a decedent; and

               (15)    income from an interest in an estate or trust."

26 U.S.C. § 61(a) (emphasis added). Under Georgia law, the Internal Revenue Code's definition

of "gross income"-as an aggregate of "all income" with no reference to any deduction for

expenditures-is adopted for Georgia tax purposes. See Ga. Comp. R. & Regs. 560-7-6-.02(1)

("Any term used in these Regulations has the same meaning as when used in a comparable

context in the laws of the United States or Regulations of the Internal Revenue Service, relating

to Federal income taxes, unless a different meaning is clearly required or the term is specifically

defined in the Georgia Code or Regulations.").

       While "income" is generally used interchangeably with "gross income" to refer to all

sources of gain or receipts without regard for expenses or other deductions, in specific contexts

the term "gross income" has been given a more limited definition which requires a deduction for

the "cost of goods sold."          Most notably, Treasury Regulation 1.61-3(a) states that for a



                                                  17

                                                                                                      1095
manufacturing, merchandising, or mining business, 13 "gross income" means "the total sales, less

the cost of goods sold, plus any income from investments and from incidental or outside

operations or sources."           This IRS regulation has been applied on multiple occasions in

determining the "gross income" of businesses governed by that provision.                 See,~.    Sullenger v.

C.I.R .. 11 T.C. 1076, 1077 (1948) ("[T]he Commissioner has always recognized, as indeed he

must to stay within the Constitution, that the cost of goods sold must be deducted from gross

receipts in order to arrive at gross income."); Kazhukauskas v. C.I.R., T.C. Memo. 2012-191,

2012 WL 2848694, at *9 (2012) ("Thus, cost of goods sold is an offset to gross receipts for

purposes of computing gross income, and deductions are subtracted from gross income in

arriving at taxable income."); Beamer v. Franchise Tax Bd., 563 P.2d 238 (Cal. 1977) (holding

that Texas gas and oil production taxes were not taxes on "gross income" because they did not

include any deduction for expenses). And the Amerada Hess case specifically noted both an

"ordinary dictionary" definition of income and the "more restrictive" definition of income --"i.e.,

gross receipts less costs of goods sold." Amerada Hess, 526 A.2d at 1042.

           So there is extensive support for the proposition that the term "gross income" is

synonymous with "income" and includes all sources of income without regard for expenses or

other deductions. There is also authority that "gross income" necessarily includes a deduction

for the "cost of goods sold."              Indeed, the Wisconsin Tax Appeals Commission in Delco

Electronics noted the split of authority on just this issue.                   It did not resolve the question,

however, because it was able to reach a decision on the deductibility of the tax in that case (the

Michigan Single Business Tax) without reaching a conclusion as to the scope of the phrase •

"gross income." Delco Elecs. Corp. v. Wis. Dep't of Revenue, No. 95-I-112, 1997 WL 331967,


13
     RNDC operates a merchandising business in which it distributes alcohol.

                                                          18

                                                                                                                  1096
at *10 (Wis. Tax. App. Comm'n, June 16, 1997) ("We do not believe it is necessary here to

define the outer limits of 'gross income,' because the issue can be resolved on other grounds.").

        As in Delco Electronics, it is not necessary to determine the precise meaning of "income"

in order to reach a resolution in this case. It will be seen that even under the narrower definition

of "income" (providing for the cost of goods sold deduction) the Texas Franchise Tax is a tax

"on or measured by income." That is to say, the Texas Franchise Tax is "on or measured by

income" under either the broad definitions of "income" and "gross income" discussed above or

the more restrictive definition of "gross income" found in the Treasury Regulation and other

authorities.

        2. The Texas Franchise Tax is based on the same items of "income" used in
           computing the Federal income tax base.

        During 2008, Texas imposed its entity-level franchise tax on the "taxable margin" of each

"taxable entity" doing business in Texas. Tex. Tax Code Ann. §§ 171.001(a), 171.002(a)-(b).

The term "taxable entity" was defined to include, inter alia, "a partnership, limited liability

partnership, corporation, banking corporation, savings and loan association, [and a] limited

liability company . . . . " Tex. Tax Code Ann. § 171.0002(a).         The Texas Comptroller has

explicitly ruled that S corporations and LLCs are subject to the Texas Franchise Tax, and the

parties have stipulated in this case that RNDC-an LLC that was doing business in Texas in

2008-reported and paid Texas Franchise Tax for that year. See Texas Policy Letter Ruling No.

200609761L (Sept. 6, 2006).

        Because the Texas Franchise Tax is imposed on a taxable entity's "taxable margin," the

Taxpayer must show that the "taxable margin" base is one that is "on or measured by income"

for purposes ofO.C.G.A. § 48-7-27(d)(l)(C). As will be seen, it is-because a business's "total




                                                 19

                                                                                                       1097
revenue" and "taxable margin" for Texas Franchise Tax purposes are comprised of the same

items that are used in determining "gross income" for federal and Georgia income tax purposes.

       The starting point for determining the amount of the taxable margin is to compute the

taxpayer's "total revenue from its entire business." Tex. Tax Code Ann. § 171.101(a). For

taxable entities treated as partnerships for federal income tax purposes (such as NDC Leasing),

Tex. Tax Code Ann.§ 171.101l(c)(2) and the Instructions to the Texas Franchise Tax Report

state that "total revenue" is computed by

       a.          Adding:

              i.      The amount reported as income on line 1c of IRS Form 1065 (for gross

                      receipts or sales less "returns and allowances");

             u.       The amount reported as income on line 6a of Schedule K of Form 1065

                      (dividend income);

            iii.      The amount reported as income on line 5 of Schedule K of Form 1065

                      (interest income);

            iv.       The amounts reported as income from line 3a of Schedule K of Form 1065

                      and line 17 of Form 8825 (rental income);

             v.       The amount reported as income on line 7 of Schedule K of Form 1065

                      (royalty income);

            v1.       The amounts reported as income on line 6 of Form 1065 and lines 8, 9a, and
                                                                                               I



                      10 of Schedule K of Form 1065 (net gains or losses attributable to capital

                      assets or other sales of business property);

            vn.       The amounts reported as income on lines 4 and 7 of Form 1065, line 11 of

                      Schedule K of Form 1065 (to the extent not already included), and the amount



                                                    20

                                                                                                     1098
                from line 11, plus line 2 or line 45 of Form 1040, Schedule F (other income or

                loss); and

     viii.      Any "total revenue" reported by a lower-tier entity as includable in the taxable

                entity's total revenue under the tiered partnership election under Tex. Tax

                Code Ann.§ 171.1015(b); and then

b.           Subtracting from that total:

        1.      The amount reported on line 12 of Form 1065 (bad debt expensed for federal

                income tax purposes);

       u.       Foreign royalties and foreign dividends, to the extent included m gross

                revenue;

      iii.      Net distributive income from a taxable entity treated as a partnership or as an

                 S corporation for federal income tax purposes (to avoid double Texas taxation

                of the revenue of those entities);

       tv.      Allowable deductions from IRS Form 1120, Schedule C, to the extent related

                to dividend income included in total revenue;

       v.       Items of income attributable to an entity that is disregarded for federal income

                tax purposes (again, to avoid double Texas taxation of the revenue of those

                 entities);

       VI.       Dividends and interest from federal obligations; and

      vu.        "Other deductions" to the extent that they were included in the taxpayer's




                                              21

                                                                                                   1099
                     gross revenue. See Exhibit A, at 10-13 (Instructions to 2009 Texas Franchise

                     Tax Report); see also Tex. Tax Code Ann. § 171.1011 (c)(2). 14

For all types of entities, Section 171.101(a)(l) of the Texas Tax Code then defines the "taxable

margin" for taxable entities as the lesser of (A) 70 percent of the taxable entity's "total revenue";

or (B) "total revenue" less cost of goods sold; or (C) "total revenue" less compensation. 15

        The starting point for computing the Texas Franchise Tax is thus the sum of essentially

every relevant item of business "income" that is included in the definition of "gross income" for

federal income tax purposes. A comparison of (i) the line items of "income" included in the

computation of "total revenue" for Texas Franchise Tax purposes with (ii) the line items shown

on the tax forms for computing the federal gross income of a partnership or an S corporation

reveals that the Texas "total revenue" and federal gross income bases are essentially identical.

Compare Tex. Tax Code Ann. §§ 171.101l(c)(l) with 171.101l(c)(2). When one reviews the

relevant federal tax returns filed by NDC Leasing, National Distributing, NDC Partners, and

RNDC, and RNDC's Amended Texas Franchise Tax Report it can be seen that the "total

revenue" for each partnership or S corporation under the Texas Franchise Tax is computed by

adding the line items of "income" that were included on the relevant partnership or S corporation

return that was filed for federal income tax purposes.

        3. Whichever alternative definition of "income" is used, the Texas Franchise Tax is
           a tax "on or measured by income."




14
   The computation of "total revenue" for corporations treated as S corporations for federal income tax purposes
(such as National Distributing) similarly tracks the line items from the entity's federal return (Form 1120S). See
Instructions to 2009 Texas Franchise Tax Report; see also Tex. Tax Code Ann. § 171.1011(c)(l).
15
  RNDC determined its taxable margin using the "cost of goods sold" deduction provided for in Tex. Tax Code
Ann. § 171.101(a)(1)(B)(ii)(a). Both "cost of goods sold" and "compensation" are computed under the Texas Tax
Code in a manner that is substantially similar to the federal deduction afforded to such items. See Tex. Tax Code
Ann.§§ 171.1012, 171.1013.

                                                       22

                                                                                                                     1100
       So the Texas Franchise Tax is a tax based on or measured by "income" or "gross income"

whether one uses (i) the broad and ordinary definition of "income" or (ii) one of the technical

definitions of "gross income" in conducting the analysis.

       First, the concept of "total revenue" that serves as the initial basis for computing the

Texas Franchise Tax base is based on or measured by "income" or "gross income," as those

terms are broadly defined, because "total revenue" is computed by adding up all of the specified

line items of "income" used in computing a pass-through entity's federal income tax base. By

using all of the specific and relevant line items from a pass-through entity's federal income tax

return to compute "total revenue," it is tautological to conclude that "total revenue" under the

Texas Franchise Tax is on or measured by "income."

       Alternatively, the Texas Franchise Tax is also based on or measured by "income" when

focusing on the "taxable margin." The first option for computing the "taxable margin" is simply

to take 70 percent of the "total revenue" base that is comprised of items from the entity's federal

income tax base. See Tex. Tax Code Ann. § 171.101(a)(l). Using this method, a taxpayer's

"taxable margin" would still be on or measured by "income," because it is comprised exclusively

of the items used to compute the taxpayer's "income" on a federal return, before deductions.

Alternatively, taxpayers may elect to compute their "taxable margin" by deducting the "cost of

goods sold" from their "total revenue." See Tex. Tax Code Ann. § 171.101(a)(l). This second

option is how RNDC-a merchandiser- in fact computed its taxable margin for purposes of

reporting its Texas Franchise Tax. So this method of computation of the Texas Franchise Tax is

also one that is on or measured by "income" because RNDC's tax base began with the taxpayer's

"total revenue"-- which, as described above, is based on 'income" or "gross income"-- and then

was further computed using a deduction for "cost of goods sold." This method of calculation is



                                                23

                                                                                                      1101
in accord with the more restrictive definition of "gross income" that applies for federal income

tax purposes to a merchandising business (such as RNDC). See Treas. Reg.§ 1.61-3(a).

       The Texas Franchise Tax is thus on or measured by "income," whether the focus is on the

"total revenue" base or the "taxable margin" base. Because Petitioner received pass-through

income that was subject to Texas Franchise Tax, it then follows that Petitioner is entitled to an

adjustment for the "portion of the income on which such tax was actually paid." See O.C.G.A.

§ 48-7-27(d)(l)(D) (noting that in "multi-tiered situations, the adjustment for such individual

shall be determined by allocating such income between the shareholders, partners, or members at

each tier based upon their profit/loss percentage").

H.     The conclusion that Petitioner qualifies for the benefits ofO.C.G.A. § 48-7-
       27(d)(l)(c) is consistent with the policy underlying this statute.

       The conclusion that the Texas Franchise Tax is a tax "on or measured by income" finds

strong support in the policy underlying O.C.G.A. § 48-7-27(d)(l), which-according to the

Georgia Court of Appeals in a case involving the taxation of an S corporation's pass-through

income-is to allow shareholders or members of a pass-through entity "to avoid the double

taxation that would otherwise occur if the shareholder paid taxes on any portion of his passed-

through income on which the corporation had already paid income taxes . . . at the corporate

level." Graham v. Hanna, 297 Ga. App. 542, 545-46 (2009).             This policy underlying the

adjustment provisions in O.C.G.A. § 48-7-27(d)(l) strongly supports Petitioner's contention that

he is entitled to the Section 48-7-27(d)(l)(C) adjustment for the portion of his distributive shares

of income on which RNDC already paid Texas Franchise Tax.

I.     The adjustment under O.C.G.A. § 48-7-27(d)(l)(C) for taxes "on or measured by
       income" is not limited to taxes that are "on or measured by net income."

        Respondent counters that the Texas Franchise Tax does not qualify for purposes of



                                                 24

                                                                                                       1102
O.C.G.A. § 48-7-27(d)(l)(C) because it is not a "net income" tax. The Department denied

Petitioner's request for a letter ruling with respect to O.C.G.A. § 48-7-27(d)(l)(C) on the basis

that the term "income" in that provision ought to be construed as "net income." This was the

basis for denying Petitioner's refund claim and continues to be the basis urged before this

Tribunal. B\lt to so construe the statutory language imposes a restriction that is simply not

contained in the statute.

       1. In contrast to "income" and "gross income," for tax purposes, "net income" is
          always defined to include the deduction of expenses.

       Unlike the terms "income" and "gross income"-which are not directly defined in the

Georgia Tax Code-an individual's "net income" is specifically defined by reference to the

individual's "federal adjusted gross income" less certain deductions and subject to certain

addition adjustments. See O.C.G.A. § 48-7-27; see also Ga. Dep't of Revenue v. Ga. Chemistry

Council, Inc., 270 Ga. App. 615, 617 (2004) (recognizing that an individual taxpayer's "net

income" is the individual's "federal adjusted gross income, less deductions") (citing O.C.G.A.

§ 48-7-27(a)).   The Georgia statutory definition of "net income" comports with a standard

dictionary definition, as Black's defines "net income" as "the profit of a business arrived at by

deducting operating expenses and taxes from gross receipts." Black's Law Dictionary (9th ed.

2009). Thus, whereas "income" and "gross income" are often used interchangeably, "net

income" has a specified technical meaning that is different from "income" or "gross income."

Yet despite the differences among those terms, the Department denied Petitioner's request for a

letter ruling with respect to O.C.G.A. § 48-7-27(d)(l)(C) on the basis that the term "income" in

that provision ought to be construed as "net income."

        In addition to violating various rules of statutory construction (discussed below), the

Department's position on this issue contradicts the Georgia Court of Appeals' direction in I.B.M.


                                               25

                                                                                                    1103
that terms of art used in the tax code must be given their proper technical construction. In that

case, the Department argued that a taxpayer should have added back to its taxable income all

"franchise, excise, and privilege taxes paid in other states which were measured by income"

under a statute which required the add-back of all "income taxes" imposed by other states.

I.B.M., 142 Ga. App. at 160 (interpreting the predecessor version of current O.C.G.A. § 48-7-

27(b)(3)). But the Court of Appeals rejected the Department's contention that "income tax"

means "any tax, the amount of which is determined by income," instead holding that "income

tax" is a "term of art" which refers to "taxes on income and does not include taxes on subjects

other than income, although measured by income." Id. (emphasis added). Therefore, based on

the Court of Appeals' decision in I.B.M., "income tax" is a term of art which applies only to

taxes "on income"-a set of taxes that is narrower than the set of taxes that are "measured by

income," and which includes many taxes labeled as "franchise, excise, and privilege taxes" by

other states.   See id.; see also Amerada Hess, 526 A.2d at 1044 ("State taxes that are

denominated franchise or excise taxes are often measured by income."). The Texas Franchise

Tax is just such a tax -- a tax that is labeled a "franchise tax" but which is "on or measured by

income".

       2. Interpreting O.C.G.A. § 48-7-27(d)(l)(C) to add the term "net" income is
          inconsistent with well-settled rules of statutory construction.

       The Department denied the Petitioner's ruling request reasoning that the adjustment in

O.C.G.A. § 48-7-27(d)(l)(C) was intended to apply only to taxes on or measured by net income.

Such an interpretation contravenes at least four well settled rules of statutory construction.

       First, interpreting O.C.G.A. § 48-7-27(d)(1)(C) to apply only to pass-through income that

was taxed in another state which imposes a tax "on or measured by net income" violates the rule

of construction that statutes are to be interpreted "according to the natural and most obvious


                                                 26

                                                                                                    1104
import of the language, without resorting to subtle and forced constructions." Graham v. Hanna,

297 Ga. App. 542, 545 (2009).         To interpret "income" to mean "net income"--despite the

Georgia Tax Code's frequent use of both of these terms of art-would be to impose a "forced

construction" on the plain language of the statute, in conflict with the "natural and most obvious"

definition of "income."

        Second, to interpret the statute as applying only to a tax "on or measured by net income"

violates the rule that "a statute must be construed in relation to other statutes of which it is a part,

and all statutes relating to the same subject-matter, briefly called statutes in pari materia, [must

be] construed together, and harmonized whenever possible." Tew v. State, 320 Ga. App. 127,

130 (2013). To interpret the adjustment for "taxes on or measured by income" in O.C.G.A. § 48-

7-27(d)(l)(C) to apply only to taxes "on or measured by net income" fails to harmonize the

different terms of art used in the specific income tax adjustment provisions provided by the

General Assembly, including but not limited to Code Sections 48-7-21, 48-7-23, 48-7-24, 48-7-

27, and 48-7-28.      Stated a bit differently, to read the word "net" into O.C.G.A. § 48-7-

27(d)(l)(C) is to ignore the General Assembly's provision for numerous adjustments in Sections

48-7-21 and 48-7-27 which turn on the nature of the tax to which the taxpayer has been

subjected.

        Third, to accept Respondent's position on this issue would violate the rule that requires

statutes to be interpreted to "avoid a construction that makes some language mere surplusage."

Singletary v. State, 310 Ga. App. 570, 572 (20 11 ). That conclusion is unavoidable, because an

interpretation concluding that the adjustment for "taxes on or measured by income" in O.C.G.A.

§ 48-7-27(d)(l)(C) applies only to taxes "on or measured by net income" renders the use of the

term "net" in Code Sections 48-7-21(b)(2), 48-7-28, and other sections of the Code "mere



                                                  27

                                                                                                           1105
surplusage," because two different terms of art would be interpreted as having the same meaning.

Contrast O.C.G.A. § 48-7-2l(b)(2)) with O.C.G.A. § 48-7-27(d)(l)(C) (emphasis added); see

also O.C.G.A. § 48-7-28 ("A resident individual who has an established business in another state

... may deduct from the tax due upon the entire net income of the resident individual the tax

paid upon the net income of the business ... in another state when the business ... is in a state

that levies a tax upon net income.") (emphasis added).

       Finally, interpreting O.C.G.A. § 48-7-27(d)(l)(C) so that it only applies with respect to

pass-through income taxed in another state which imposes on the entity a tax "on or measured by

net income" violates the rule which requires a presumption that all statutes are "enacted with full

knowledge of existing law." Singletary, 310 Ga. App. at 572.          To interpret Section 48-7-

27(d)(l)(C) to apply only to taxes on or measured by "net income" fails to acknowledge or give

effect to the numerous specific statutory adjustment provisions applicable to taxes on "net

income"-such as Sections 48-7-21(b)(2) and 48-7-28-that existed prior to the codification of

Section 48-7-27(d)(1)(C).    See 2006 Ga. Laws Act 619, H.B. 1160 (Ga. Reg. Sess. 2006)

(codifying Sections 48-7-27(d)(l)(C)-(D)).

       3. Respondent's arguments that it is unreasonable not to construe O.C.G.A. § 48-7-
          27(d)(l)(C) to limit it to taxes imposed on net income are not persuasive.

               (a)    Use of the term "adjusted gross income" elsewhere in the statute does not
                      establish that O.C.G.A. § 48-7-27(d)(l)(C) is meant to apply to "net
                      income" when applied to an entity.

       It is well settled that a statute should not be construed in a manner that leads to "an

unreasonable result unintended by the legislature." Haugen v. Henry Cnty., 277 Ga. 743, 745

(2004). Respondent argues it would be "unreasonable" to construe "on or measured by income"

as it is written, because the phrase "is preceded twice by references to the taxpayer's 'federal

adjusted gross income' .... " The Respondent asserts that the phrase "on or measured by


                                                28

                                                                                                      1106
income" must therefore have been intended to be modified by "federal adjusted gross income,"

which uses a "net income base."

       This argument overlooks the fact that "adjusted gross income" is a defined term that is

defined specifically in reference to the computation of an individual's taxable income and

therefore would not have been used to describe the measure of an entity's income. See O.C.G.A.

§ 48-7-27(a) ("Georgia taxable net income of an individual shall be the taxpayer's federal

adjusted gross income, as defined in the [IRC] of 1986," subject to specified adjustments)

(emphasis added); I.R.C. § 62(a) ("For purposes of this subtitle ... the term 'adjusted gross

income' means, in the case of an individual, gross income minus the following deductions ... ")

(emphasis added). Since "adjusted gross income" only applies to the income of an individual, it

would be incorrect to construe "adjusted gross income" as used in Section 48-7-27(d)(1)(C) as

modifYing the phrase "on or measured by income" when used in reference to the income of a

pass-through entity. Therefore, it is more reasonable to construe "on or measured by income"

according to its ordinary meaning and not seek to impose a "forced construction" on the statute.

See,~.   I.B.M., 142 Ga. App. at 160 (stating that the legislature is assumed to have understood

the technical meaning of its chosen language and holding that "the statute shall be construed in

accordance with the accepted legal definition" of that language).

               (b)    Use of the term "income tax" in O.C.G.A. § 48-7-27(b)(3) does not
                      require that O.C.G.A. § 48-7-27(d)(l)(C) also be construed to be limited
                      to "income taxes."

       Respondent argues that it is necessary to add the concept of "net" income to O.C.G.A.

§ 48-7-27(d)(l)(C) in order to "harmonize" this provision with the other provisions ofO.C.G.A.

§ 48-7-27, particularly subsection (b)(3).    But this argument begs the question of why the

legislature would have used the phrase "on or measured by income" if it intended for the



                                                29

                                                                                                   1107
adjustment to apply only to "income taxes"-a different term of art used elsewhere in the Code.

We must assume that the General Assembly intended something different from "on or measured

by net income" by not using that phrase. Dep't of Human Res. v. Clay, 247 Ga. App. 392, 396

(2000), disapproved on other grounds. Ga. Dep't of Transp. v. Heller, 285 Ga. 262 (2009)

("[A]ny decision to depart from the federal language must have been made for a reason. The

question thus becomes, 'Why did the legislature elect to make the state statute different from the

federal statute?' The answer cannot be ... [b]ecause it wanted the meaning to be identical.").

               (c)    It is reasonable to apply O.C.G.A. § 48-7-27(d)(l)(C)'s adjustment
                      provision as written, even if some of the taxes "measured by income"
                      under that provision are not "income taxes" pursuant to the add-back
                      adjustment in O.C.G.A. § 48-7-27(b)(3).

       Respondent also argues that the phrase "on or measured by income" in O.C.G.A. § 48-7-

27(d)(l)(C) must be interpreted to apply only to taxes "on or measured by net income," because

to hold otherwise might result in a "double benefit" to taxpayers who are permitted the (d)(l)(C)

adjustment but who are not required to make the Section 48-7-27(b)(3) add-back. Respondent

argues the add-back provision in subsection (b)(3) of Section 48-7-27 is the "mirror image" of

subsection (d)(l).   According to the Department, the two must therefore be interpreted in

identical fashion.

       Respondent's argument ignores the fact that in 2006 the General Assembly enacted

subsection (d)(l) to provide "additional adjustments" for taxpayers who would otherwise be

subject to double taxation. See 2006 Ga. Laws Act 619, H.B. 1160; see also Graham v. Hanna

297 Ga. App. at 546. It must be presumed that the legislature's choice of language that is

different from the language in the then existing add-back provision was intended to have

different consequences.   See,~.    Dep't of Human Res. v. Clay, 247 Ga. App. at 396 ("[A]ny

decision to depart from [prior] language must have been made for a reason.") If the legislature

                                                30

                                                                                                     1108
had intended for the (d)(l)(C) adjustment to apply only when the add-back applies, it could have

said so with a cross reference, or it would at least have used the same language in both

provisions.

           Second, Respondent argues that the legislature could not have intended that a taxpayer be

entitled to the (d)(l)(C) adjustment because the Texas Franchise Tax is "measured by income"

while also permitting the Texas Franchise Tax to be subject to the "add-back" provision in

O.C.G.A. § 48-7-27(b)(3)). The difficulty with this argument is this Tribunal has not been asked

to decide, and specifically is not deciding, whether the Texas Franchise Tax is an "income tax"

for purposes of the O.C.G.A. § 48-7-27(b)(3) add-back. That is an entirely different issue for

another day. So any argument based on this point is purely conjectural.

           Third, even assuming for purposes of argument that the Texas Franchise Tax is indeed an

add-back for purposes of O.C.G.A. § 48-7-27(b)(3), the resulting "double benefit" with which

Respondent is concerned is slight when compared with the potential "double taxation" that the

statute was designed to resolve. That difference is the natural consequence of the different

language in those provisions: Section 48-7-27(b)(3) requires the addition of "any income taxes"

imposed by other taxing jurisdictions (to the extent deducted from federal taxable income), while

Section 48-7-27(d)(l)(C) permits the subtraction of the portion of any "income" taxed in another

state, so long as that tax was "on or measured by income." Thus, while the add-back statute

requires the addition of the income tax liability in the other jurisdiction, O.C.G.A. § 48-7-

27(d)(l)(C) permits a subtraction adjustment for the entire income base that was subject to tax in

the other state-an adjustment that is typically substantially larger than the mere add-back of

taxes paid. 16 For example, as applied to this Taxpayer, the Georgia tax impact of the add-back (if


16
     Note the same would be true even when a net income base is at issue.

                                                          31

                                                                                                       1109
applicable) would be approximately $640, while the amount of the Taxpayer's claim for refund

that is attributable to the Texas Franchise Tax is in excess of $20,000. 17

        Therefore, even assuming it is required, there is nothing "unreasonable" about the

potential that a taxpayer may receive the (d)(l)(C) adjustment but will not be required to make

the (much smaller) add-back adjustment for the same taxes. This distortion must be contrasted

with the results that occur if the statute is to be interpreted so as to interpret O.C.G.A. § 48-7-

27(d)(l)(C) in a manner that undercuts the legislature's intent, just so that it is co-extensive with

a different statutory provision that uses different language, would certainly be the type of

"unreasonable result unintended by the legislature" that the rules of statutory construction forbid.

                (d)      The differences between the Georgia and Texas tax bases do not make the
                         application of O.C.G.A. § 48-7-27(d)(l)(C) to the Texas Franchise Tax
                         unreasonable.

        Respondent's argument that the difference between the Georgia and Texas tax bases

requires the conclusion that the Texas Franchise Tax is not "on or measured with respect to

income" simply does not withstand analysis. All states that impose a tax based on or measured

by income (or on net income for that matter) impose a tax on a base that ultimately differs-

sometimes substantially-from the "federal taxable income" base because of each state's

specific addition and subtraction adjustments.             It is not only taxes which are measured by

"income" that might generate the need to perform certain modifications in order to compute the

adjustment under O.C.G.A. § 48-7-27(d)(l)(C) properly. Substantial differences might also arise

in the computation of a tax based on net income such that similar modifications are necessary to



17
  The Taxpayer computed the approximate Georgia tax impact of the add-back provision with respect to the Texas
Franchise Tax by taking the following steps: (1) determining the Texas Franchise Tax paid by RNDC for the 2008
tax year-$904,285.00; (2) multiplying that amount by the Taxpayer's distributive share percentage of RNDC's
income for that year (1.179960646%) to determine the amount that would be required to be added to the Taxpayer's
adjusted gross income; and (3) multiplying the amount of the add-back by the Georgia tax rate of 6 percent.

                                                      32

                                                                                                                   1110
compute the Georgia adjustment. 18 Under this argument, no tax would qualify under O.C.G.A.

§ 48-7-27(d)(l)(C) unless the tax bases were substantially identical.

        Instead of focusing on the differences between two states' tax bases as evidence of why

O.C.G.A § 48-7-27(d)(l)(C) should be interpreted more narrowly than the plain language

indicates, the rules of statutory construction and common sense suggest a much simpler

conclusion: that the legislature passed the law with the intention of preventing double taxation,

and that it drafted the statute to apply to a broad set of taxes in order to maximize the adjustment

provision's impact. By focusing on the statute's remedial intent, it is much more reasonable to

conclude that the statute should be applied as written. The Department can, if it chooses to do

so, exercise its regulatory authority to provide guidance regarding such base modifications, so

that taxpayers only receive an adjustment "for the portion of the income on which such tax was

actually paid" by the pass-through entity. See O.C.G.A. § 48-7-27(d)(l)(D). The Department

has the authority and ability to promulgate regulations and/or provide other guidance to explain

how taxpayers should compute such adjustments.                   See, Q.&, O.C.G.A. § 48-2-12.             So the

adjustment to all taxes "on or measured by income" does not yield any "unreasonable results"




18
    For example, a partnership that is subject to tax in Tennessee and which receives dividends from an SO-percent-
owned corporation can take a dividends-received deduction for Tennessee excise tax purposes; however, that
dividend income is included in the partnership's (and, ultimately, partner's) federal taxable income, and would
therefore show up in the partner's tax base for purposes of computing the Georgia adjustment under Section 48-7-
27(d){l)(C). To compute the "portion of income on which such [Tennessee] tax was actually paid," the partner
would have to-among other modifications-eliminate the dividend from the Tennessee tax base. Under the
Department's view, does that substantial modification affect whether the Tennessee tax was "measured by income"
for purposes of the adjustment? It should not. Such modifications are an inevitable consequence of the legislature's
decision to provide an adjustment for taxes "measured by income." There are numerous other examples of
adjustments that can cause significant differences between federal taxable income and a state tax base-including a
state net income tax base-such as bonus depreciation (see. e.g., Tenn. Code Ann. § 67-4-2006(b)(l)) and related-
party intangible expense add-backs (see. e.g., Ala. Code§ 40-18-35(b)(l)).



                                                        33

                                                                                                                       1111
under O.C.G.A. § 48-7-27(d)(l)(C). And note again that Respondent is well equipped with the

tools available to address such issues if they do in fact arise. 19

         The application of the O.C.G.A. § 48-7-27(d)(l)(C) adjustment to all taxes "on or

measured by income" does not lead to any unreasonable results. Rather, those differences are

the natural consequence of the legislature's decision to extend the remedial adjustment to all

taxes on or measured by "income," rather than limiting it only to those taxes on or measured by

"net income." It is much more reasonable to conclude that such differences (to the extent they

are perceived as problematic) should be resolved by applying the straightforward and ordinary

meaning of the statute and permitting taxpayers to take the adjustments, but then requiring all

necessary modification adjustments to the tax base (pursuant to O.C.G.A. § 48-7-27(d)(l)(D)),

rather than to undermine the legislative intent by interpreting the remedial statute more narrowly

than the legislature provided. See Ins. Dep't of Ga. v. St. Paul Fire & Cas. Ins. Co., 253 Ga. App.

551, 554 (2002) ("[U]ncertainties or ambiguities in remedial statutes should be resolved in favor

of a liberal interpretation .... ").

J.       Other states that have considered the issue have concluded that the Texas franchise
         tax is either a tax "on or measured by income" or an "income tax."

         1.       A number of states have concluded that the Texas Franchise Tax is a tax "on
                  or measured by income" or an "income tax."




19
     Indeed, a major reason the Department's administrative position in this case is not entitled to any deference is
that the Department has done nothing to explicate the application or operation of this statute which, while simple on
its face, quickly becomes extremely complex in application once one begins to attempt to mesh the calculations of
very different state tax systems to calculate the adjustment. Yet it appears the Department has only addressed the
application of O.C.G.A. § 48-7-27(d)(l)(C) twice-as to taxes imposed by Tennessee and Texas-and each time
only in conclusory answers to "frequently asked questions" posted on the Department's website. There are other
jurisdictions that have entity level taxes on flow-through entities, at least one of which is an issue in this case. See
Ely Chart. And, as noted, the calculations under this statute are susceptible to being computed in a number of
alternative ways. And yet there appears to be no published guidance from the Department on any of these issues.
So Respondent's argument that the Department's position on the issue in this case should be given deference rings
hollow.

                                                          34

                                                                                                                           1112
       When we look to other states, we see that a number of state taxing authorities have

determined that the Texas Franchise Tax is a tax "on or measured by income" or even gone

further and concluded it is an "income tax." Indeed, there do not appear to be any authorities

that have considered the precise issue in this case that have determined that the Texas Franchise

Tax is not a tax "on or measured by income."


       First, in a letter of findings, the Indiana Department of State Revenue (the "Indiana

Department") determined that the Texas Franchise Tax qualifies as a tax "based on or measured

by income." Ind. Dep't of State Rev. Letter of Findings No. 02-20120562 (Apr. 24, 2013). To

determine Indiana adjusted gross income, Indiana requires taxpayers to add to federal adjusted

gross income "an amount equal to any deduction or deductions allowed by [the Internal Revenue

Code] for taxes based on or measured by income and levied at the state level by any state of the

United States." Ind. Code § 6-3-1-3.5(b) (emphasis added). The Indiana Department determined

that taxpayers are required to add back taxes paid pursuant to the Texas Franchise Tax because

the tax "starts with and is based on the entity's income as reported on the federal income tax."

Ind. Dep't of State Rev. Letter of Findings No. 02-20120562. Accordingly, the Indiana

Department concluded: "[i]t is apparent from the face of the law that the [Texas Franchise Tax

is] 'based on or measured by income."' Id.

       Second, the Missouri Department of Revenue (the "Missouri Department") issued a letter

ruling determining that the Texas Franchise Tax is an "income tax" under Missouri law. Mo.

Private Letter Rul. No. LR 5309 (Dec. 12, 2008).         To reach its conclusion, the Missouri

Department extended to the Texas Franchise Tax the reasoning of Herschend v. Director of

Revenue, 896 S.W.2d 458 (Mo. 1995). Herschend established that, in order to qualify as an

"income tax" under Missouri law (and thus provide a credit against Missouri income tax),


                                               35

                                                                                                    1113
another state's tax must satisfy two criteria. The tax must be (i) "based on federal taxable

income" and (ii) must "pay compensation for benefits, such as roads, police, and fire protection,"

rather than tax the privilege of doing business in the state. Mo. Private Letter Rul. No. LR 5309.

According to the Missouri Department, the Texas Franchise Tax is "based solely on various

types of income reported on the federal income tax return" and "is a compensatory tax that

operates as an income tax." Id. (internal quotation marks omitted). Therefore, according to the

Missouri Department, the tax meets both criteria of Herschend and qualifies as an income tax.

        Third, the Kansas Department of Revenue concluded that "the revised Texas franchise

tax is based on income and is therefore in the nature of an income tax," at least as long as the

cost of goods sold or compensation deduction methodologies are used. Kan. Op. Letter No. 0-

20009-005; Kan. Op. Letter No. 0-2008-004 (Sept. 2, 2008). The Kansas Department of

Revenue made its determination despite the fact that Texas itself describes the Texas Franchise

Tax as a privilege tax, rather than an income tax. See also Ind. Dep't of State Rev. Letter of

Findings No. 02-20120562 ("The Texas tax is designated as a 'margin tax' or 'franchise tax' but

merely labeling the tax as such does not change the nature of the tax.").

        Finally, the California Franchise Tax Board has determined that the Texas Franchise Tax,

when computed using the cost-of-goods method, "qualifies as an income tax." Cal. FTB

Technical Advice Memo. No. 2011-03 (Apr. 13, 2011)?0 When determining if taxes paid to

another state by a pass-through entity create a credit against California income taxes, California

law distinguishes between gross income taxes (which are eligible for the credit) and gross

receipts taxes (which are not). Using the cost-of-goods method to calculate the base of the Texas

20
  The California Franchise Tax Board recently withdrew the guidance provided in Technical Advice Memorandum
No. 2011-03, stating that it will be issuing "additional guidance." See Cal. FTB Technical Advice Memo. No. 2014-
01 (Jan. 28, 2014). There is no indication that the FTB intends to change its view regarding the Texas Franchise
Tax. Given that Memorandum No. 2011-03 also addressed the old "Michigan Business Tax," it would appear likely
that the withdrawal is to provide updated guidance regarding the new Michigan tax regime.

                                                       36

                                                                                                                    1114
Franchise Tax excludes all "return on capital"; therefore, the Franchise Tax Board determined

that a taxpayer electing the cost-of-goods deduction under the Texas Franchise Tax is entitled to

the credit because the tax for such taxpayers is "on or measured by income." Id. 21

K.      Those authorities that have concluded that the Texas Franchise Tax is not a tax on
        "net income" are not persuasive.

        Though no state has determined that the current version of the Texas Franchise Tax is not

a tax "on or measured by income," some state departments of revenue have determined that

individuals cannot take a credit or adjustment with respect to the Texas Franchise Tax. In every

such case, however, state law required the departments to examine specifically whether the

Texas Franchise Tax is a tax on net income. See Mass. DOR Directive No. 08-7 (Dec. 18, 2008)

("The [Texas franchise tax is] based on or derived directly from gross receipts and [is] not

imposed on net income.") (emphasis added); Va. Pub. Doc. Rul. No. 08-169 (Sept. 11, 2008)

("[I]t is my conclusion that the Texas Business Margin Tax is not a tax based on, measured by,

or computed with reference to net income.") (emphasis added); Minn. Rev. Notice No. 08-08

(July 21, 2008) ("It is the department's position that the Texas business margin tax is not a tax

based on net income.") (emphasis added). In each case the department of revenue found that,

because the Texas Franchise Tax does not allow for sufficient deductions for business expenses,

it is not a tax on net income.

        Because O.C.G.A § 48-7-27(d)(l)(C) does not limit its inquiry to taxes "on or measured

by net income" the reasoning of these decisions is not persuasive. Every state authority that has




21
  At least two states have gone even further than these four states, concluding that the Texas Franchise Tax is not
only on or measured by "income," but that it is actually measured by "net income." See S.C. Rev. Rul. No. 09-10
(July 17, 2009) (listing the Texas franchise tax as nondeductible from South Carolina taxable income because it is a
tax "measured by net income"); Wise. Dept. Rev. Tax Bulletin No. 156 (Apr. I, 2008) ("[T]he Texas margin tax
qualif{ies] for the credit for net income tax paid to another state .... ").

                                                        37

                                                                                                                       1115
considered whether the Texas Franchise Tax is a tax "on or measured by income" (but not

specifically a net income tax) has answered that question affirmatively.

L.        The Financial Accounting Standards Board has also concluded that the Texas
          Franchise Tax is a tax "on or measured by income."

           State departments of revenue are not the only authorities that have decided that the Texas

Franchise Tax as one "on or measured by income." The Financial Accounting Standards Board

("F ASB") has similarly concluded that the Texas Franchise Tax should be treated as an income

tax for purposes ofFASB Interpretation Number 48.22 FASB, Minutes of the August 2, 2006

Meeting on Potential FSP: Texas Franchise Tax. ("The staff received technical inquiries from

constituents requesting the staffs opinion on whether the Texas Franchise Tax was an income

tax that should be accounted for under Statement 109.                     After discussing the issue with

constituents, the staff concluded that the Texas Franchise Tax is an income tax because the tax is

based on a measure of income.") (emphasis added). This determination under FASB

Interpretation Number 48 is important, because with respect to every "income tax" to which the

standard applies, it governs the recognition of deferred tax liabilities and assets for the future tax

consequences of events that have been recognized in an entity's financial statements or tax

returns.

           Not surprisingly, each of the nation's four maJor accounting firms has also issued

guidance advising its clients that the Texas Franchise Tax is a tax that is "on or measured by

income" and is therefore subject to FIN 48. 23


22
   FASB Interpretation Number 48, commonly known as "FIN 48," is entitled "Accounting for Uncertainty in
Income Taxes" and interprets FASB Statement 109 (ASC 740), "Accounting for Income Taxes." See FASB, FASB
Interpretation Number 48, No. 281-B (2006).
23
     See:
     •    Guide to Accounting for Income Taxes, PricewaterhouseCoopers LLP, § 1.2.2.4 (2013),
          http://www.pwc.com/us/en/cfodirect/publications/accounting-guides/guide-to-accounting-for-income-
          taxes-2013-edition.jhtml ("As discussed in Section TX 1.2.1, we believe that a tax based on income has a

                                                        38

                                                                                                                     1116
M.       The authorities cited by Respondent to support the conclusion that the Texas
         Franchise Tax is not "on or measured by income" are not persuasive.

         To support his position that the Texas Franchise Tax is not a tax "on or measured by

income," but is instead a privilege tax or a gross~receipts tax that operates in a fundamentally

different manner than an income tax, Respondent relies principally on In re Nestle USA, Inc.,

Relator, 387 S.W.3d 610 (Tex. 2012) and Ardire v. Tracy. 674 N.E.2d 1155, 1156 (Ohio 1997).

On close examination it can be seen that these cases are inapposite.

         1.      In re Nestle USA, Inc., Relator.

         In Nestle, the petitioner challenged the constitutionality of the Texas Franchise Tax on

the grounds that it bore no reasonable relationship to its object, which is the privilege of doing

business in Texas, and therefore violates the Texas Constitution's mandate that "[t]axation shall

be equal and uniform" (Tex. Const. art. VIII, § 1(a)), the Fourteenth Amendment's Equal


         tax base that consists of income less deductible expenses. Because the margin tax has a base that possesses
         this characteristic, along with other characteristics of a tax based on income, the margin tax should be
         accounted for under ASC 740."); see also id., § 1.2.1 ("In general, practice has been that a 'tax based on
         income' would even apply to tax regimes in which revenues or receipts are reduced by only one category of
         expense.");
     •   A Roadmap to Accounting for Income Taxes, Deloitte & Touche LLP, § 2.05 (2011),
         http://www .deloitte.com/viewI en_US/us/Services/audit-enterprise-risk-services/Financial-Statement-
         Internal-Control-Audit/Accounting-Standards-
         Communications/e9e4e4b44f5be210VgnVCM300000lc56fOOaRCRD.htm ("[T]he scope of ASC 740 is
         limited to 'taxes based on income,' where income is determined after revenues and gains are reduced by
         some amount of expenses and losses."); see also !Q.,, §§ 2.13-2.15 (explaining that the Texas franchise tax
         "is determined by applying a tax rate to a base that takes both revenues and expenses into account;
         therefore, the new tax is considered an 'income tax.' . . . Therefore, the [Texas] margin tax has
         characteristics of an income tax and should be accounted for as such in accordance with ASC 740.");
     •   Financial Reporting Developments: Income Taxes, Ernst & Young LLP, § 5.6.4. (Sept. 2013),
         http://www.ey.com/Publication/vwLUAssetsAL/Financial
         ReportingDevelopments_BB 1150_Income Taxes_19September20 13/$FILE/FinancialReportingDevelopme
         nts_BB1150_IncomeTaxes_19September2013.pdf ("We believe the Revised Tax, while based on an
         entity's margins (as discussed above), is nonetheless, a tax based substantially on income, and as such is
         subject to the provisions of ASC 740."); and
     •   Accounting for Income Taxes, KPMG LLP, § 9.122 (June 2012) ("Because the tax base on which the
         Texas margin tax is computed is derived from an income-based measure, the margin tax is considered to be
         an income tax for financial reporting purposes and, therefore, the provisions of ASC Topic 740 regarding
         the recognition of deferred taxes apply to the Texas margin tax.").




                                                        39

                                                                                                                       1117
Protection and Due Process guarantees (U.S. Const. amend. XIV & 1) and the U.S.

Constitution's Commerce Clause (U.S. Const. art. I, § 8). After a lengthy discussion of the

Texas Franchise Tax (cited by both Respondent and Petitioner as supporting their respective

positions), the Texas Supreme Court upheld the constitutionality of the statute as a privilege tax.

      From the Texas Supreme Court's statement that the Texas Franchise Tax is a privilege tax,

Respondent then jumps to the conclusion that because the Texas Franchise Tax is a privilege tax,

it is not an income tax, and, therefore, because it is not an income tax, it cannot be a tax "on or

measured by income." Respondent urges that because the Texas Franchise Tax is a "privilege"

tax, the Texas tax "is not an income tax, but rather a gross receipts or a privilege tax."

      There are multiple difficulties with Respondent's logic.

      First, it is well-established that how a tax is labeled is not dispositive of a tax's measure.

See,~.     Complete Auto Transit. Inc. v. Brady, 430 U.S. 274 (1977) (rejecting formalistic rules

which would determine the constitutionality of a tax based on its nomenclature, and instead

looking to the tax's substance); Amerada Hess Corp. v. Dir., Div. of Taxation, 526 A.2d 1029,

1044 (N.J. 1987), affd., 490 U.S. 66 (1989) ("State taxes that are denominated franchise or

excise taxes are often measured by income."); MacFarlane v. Utah State Tax Comm'n, 134 P.3d

1116, 1119-20 (Utah 2006) ("The Tax Commission's focus on the labels of the taxes as

franchise, excise, or income taxes ... is misplaced."); Beamer v. Franchise Tax Bd., 563 P.2d

238, 242 (Cal. 1977) ("In ascertaining whether the Texas taxes are on or measured by income ...

our task is to determine their true nature and not to be guided by labels.").24 Indeed, even the

Tennessee Excise Tax, Tenn. Code Ann. Section 67-4-2007, et seq. which Respondent agrees

24
  The most famous statement regarding the irrelevance of the "label" in defining the measure of a tax was recited by
the U.S. Supreme Court in Trinova: "A tax on sleeping measured by the number of pairs of shoes you have in your
closet is a tax on shoes." Trinova Corp. v. Mich. Dep't of Treas., 498 U.S. 358, 374 (1991) (citing Jenkins, State
Taxation oflnterstate Commerce, 27 U. Tenn. L. Rev. 239,242 (1960)). Thus, a tax may be "measured by income,"
regardless ofthe label used to describe it.

                                                        40

                                                                                                                       1118
qualifies for the adjustment under O.C.G.A. § 48-7-27(d)(7)(C) is formally categorized as an

excise, rather than income, tax.

       Second, and more importantly, Respondent makes his logical jump without analyzing the

relevant terms and without discussing any of the features that would distinguish a "gross receipts

tax" or a "privilege tax" from a tax "measured by income," and without discussing or attempting

to identify what a privilege tax is "measured by." Indeed, as Petitioner correctly notes, there is

much in the Texas Supreme Court's opinion which is supportive of Petitioner's contentions in

this case. 25

       And finally, as noted above, the issue in this case is not whether the Texas Franchise Tax is

an "income tax." The issue is whether the Texas Franchise Tax is a tax "on or measured by

income." There is no dispute that the Texas Franchise Tax is an atypical tax. But even if

Respondent is correct, and even if the Texas Franchise Tax is not an income tax, the Texas
                                                                                                      26
Supreme Court's discussion in Nestle simply does not address the issue in this case.

         2.      Ardire v. Tracy.

         The other case on which Respondent relies heavily is Ardire v. Tracy. 674 N.E.2d 1155,

1156 (Ohio 1997). In that case the Supreme Court of Ohio held that the Michigan Single



25
   Among other things, the Texas Supreme Court noted that "total revenue" for purposes of computing the Texas
Franchise Tax "is income reported to the federal IRS with various deductions, limitations, and exceptions." Nestle,
387 S.W.3d at 615-16 (emphasis added); see also Nestle, 387 S.W.3d at 614 ("In 1991, the Legislature shifted the
primary basis of the franchise tax profoundly, from capital to 'net taxable earned surplus'-i.e., income."); id. at
615-16 ("The current franchise tax is the product of further legislative restructuring in 2006 .... The tax is still
based primarily on revenue .... [and] [t]otal revenue is income reported to the federal IRS ...."); id. at 621 ("Over
the years, the Legislature increased the number of exemptions, added adjustments and deductions, and shifted the
basis ofthe tax from capital to income.") (emphasis added).
26
  While the Supreme Court of Texas in Nestle noted that the Texas Franchise Tax uses an income base, in a
separate case, it avoided the specific question of whether the Texas Franchise Tax is an "income tax." See In re
Allcat Claims Serv., LP. 356 S.W.3d 455 (Tex. 2011). The court noted, however, the legislature's express
declaration that the Texas Franchise Tax "is not an income tax." See id. at 463. That issue is important because, as
explained in Allcat, under the Texas Constitution, an individual income tax, unlike a privilege tax, requires approval
by the voters in a statewide referendum.

                                                         41

                                                                                                                         1119
Business Tax ("Michigan Single Business Tax") was not "on or measured by income" for

purposes of the Ohio credit for taxes "on or measured by income."

           There are several reasons why Ardire is not persuasive, however. First and foremost, the

Ardire case dealt with the now repealed Michigan Single Business Tax. The Michigan Single

Business Tax was a unique tax with many peculiarities. It had unusual overtones of, and was

actually described as, a value added tax. It was roundly criticized in many circles as creating a

hostile business environment.        See,~.     James R. Hines Jr., Michigan's Flirtation with the Single

Business Tax, University of Michigan Ross School of Business (December 2002),

http://www.bus.umich.edu/otpr/WP2003-1paper.pdf; see also What is the Single Business Tax?,

Michigan Department of the Treasury,                http://www.michigan.gov/taxes/0,1607.7-238-43533-

154440--,00.html (last visited Nov. 13, 2014). Respondent has not shown whether or how the

Michigan Single Business Tax is at all like the Texas Franchise Tax, however, so it is difficult to

evaluate whether a holding involving the Michigan Single Business tax has any relevance to this

case. 27

           Moreover, the analysis in Ardire appears to be flawed by the court's conflation of the

phrase "on or measured by income" with the phrase "on or measured by net income." In

particular, the Ohio court concluded that the Michigan Single Business Tax was not "measured

by income" by relying exclusively on the Michigan court's analysis in Gillette Co. v. Dep't of

Treasury, 497 N.W.2d 595 (Mich. Ct. App. 1993), without recognizing that the Michigan court

had only considered whether the SBT was on or measured by "net" income. See Ardire, 674

N.E.2d at 1158-59 (reciting Gillette's conclusion that the SBT was not "measured by net


27
   At oral argument, Petitioner and Respondent both agreed that the Michigan Single Business Tax was such an
unusual tax that it would be an example of a tax that would not trigger the application of the adjustment provision of
O.C.G.A. § 48-7-27(d)(l)(C).

                                                         42

                                                                                                                         1120
income" and then concluding for Ohio purposes: "Therefore, the Michigan appellate courts have

clearly determined that the SBT is neither a tax on income nor a tax measured by income.").

       Indeed, a careful reading of Ardire suggests that the Ohio court either did not appreciate

the distinction or did not care to draw it given the highly unusual nature of the Michigan Tax.

See Ardire, 674 N.E.2d at 1158-59 (reaching its holding in reliance on Gillette's holding with

respect to "net income" and then string-citing a "number of authorities throughout this country

[which] agree with the view that Michigan's SBT is neither a tax on income nor a tax measured

by income," but proceeding instead to cite, in part, authorities that turned on whether the

Michigan Single Business Tax was "on or measured by net income").

                                     IV.      SUMMARY

       There may well be state taxes that sufficiently diverge from an income base such that

they would not be eligible for adjustment under O.C.G.A. § 48-7-27(d)(l)(C).      See,~.      First

Chicago NBD Cow. v. Dep't of State Revenue, 708 N.E.2d 631,635 (Ind. Tax Ct. 1999) (stating

that "[n]ot every tax that is measured by income subtracts costs of production ... [but] no tax

that is measured by income adds costs of production.") (emphasis in original).       Indeed, the

parties both agree that such would have been the case with the now repealed Michigan Single

Business Tax. But while the drawing of the line may be difficult in some instances in the future,

it is unnecessary to explore those boundaries here because the answer is clear.

                                   V.       CONCLUSION

       Accordingly, for the reasons discussed above, this Tribunal finds that the Texas Franchise

Tax is a tax that is "on or measured by income" for purposes ofO.C.G.A. § 48-7-27(d)(l)(C).




                                                43

                                                                                                      1121
Therefore, Petitioner's Motion for Summary Judgment must be GRANTED and Respondent's

Cross-Motion for Summary Judgment DENIED.

      SO ORDERED, this 25"' day ofNovemb7' 2014.     . .·   ~


                           ·          ~.ikDROT,JR.
                                      CHIEF JUDGE
                                      GEORGIA TAX TRIBUNAL




                                 H. ALAN ROSENBERG,

                                 PETITIONER

                                 MARY T. BENTON, CLARK R. CALHOUN,

                                 ATTORNEYS FOR PETITIONER, H. ALAN
                                 ROSENBERG

                                 SAMUEL S. OLENS, Attorney General, W. WRIGHT
                                 BANKS, JR., Deputy Attorney General, WARREN R.
                                 CALVERT, Senior Assistant Attorney General, ALEX F.
                                 SPONSELLER, Senior Assistant Attorney General

                                 ATTORNEYS FOR RESPONDENT, DOUGLAS J.
                                 MACGINNITIE, Commissioner, Georgia Department of
                                 Revenue




                                         44

                                                                                       1122
