SOLICITATION DEFINED

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SOLICITATION DEFINED

• Review the announcement of the Multi-State Tax
  Commission on p. 420. This organization is
  created by the Multistate Tax Compact MTC.
  North Dakota has joined the compact. See Chapter
  57-59, NDCC.
• These examples seem somewhat broader than they
  might have been, but are advisory only. However,
  North Dakota has adopted these regulations, as
  well as substantially all of the Multistate
  Compact regulations.

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DOING BUSINESS

• How does a corporation qualify to do business in
  a state, say North Dakota. One simply files
  papers with the secretary of state, appoints a
  local registered agent, and pays a fee. For this
  you get a certificate suitable for framing.
• Qualifying for business does not supply nexus it
  is no more than the registration of a foreign
  corporation.
• Is Matthew-Bender contrary to Wrigley? Mathew
  Bender performed two activities in Maryland it
  solicited orders for its books, which was
  protected by Public Law 86-272, but also had some
  of its books printed there by independent
  printing shops. Still, wasnt the printing the
  business of the printer, not Matthew Bender?

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APPORTIONMENT OF INCOME TO A NON-TAXING STATE

• The material on pp. 421-23 can be illustrated
  this way. Suppose a taxpayer in Fargo sells half
  its product in North Dakota and half in South
  Dakota, and property and payroll are also equally
  divided between the two states. The taxpayer
  would like to apportion half his income to South
  Dakota since it has no income tax.
• UDITPA (Uniform Division of Income for Tax
  Purposes Act) (Chapter 57-38.1, NDCC) solves
  this problem by allowing apportionment only if
  the foreign state imposes an income tax. South
  Dakota does not. Accordingly, North Dakota would
  collect a tax on all of the taxpayers income.

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COORS PORCELAIN V COLORADO

• Coors Porcelain manufacturers ceramics at Golden,
  Colorado and ships much of its production out of
  state. It had employees in other states who
  solicited orders. These salesmen had offices,
  autos supplied by Coors and samples of the
  products.
• Coors wanted to apportion its income between
  Colorado and the other states, but the Colorado
  Supreme court held that Coors was not taxable in
  these other states because of Public Law 86-272
  and nailed Coors on 100 of its income.
• If Coors had its headquarters in Grand forks and
  sold goods in Colorado under the same facts, it
  is likely that the decision in the Colorado
  courts would have gone the other way. Judges are
  state employees, after all.

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WHAT CONSTITUTES DOING BUSINESS

• In many ways this is just a repeat of the factors
  necessary to find nexus, and, as can be expected,
  the case law is in disarray. Hawaii taxed CBS on
  the rental of television videos where all events
  occurred on the mainland, while Maryland and the
  District of Colombia say that acting through an
  independent contractor is not doing business, but
  then there is Tyler Pipe from Washington to the
  opposite effect. Note that it is possible to
  have nexus for the income tax but not doing
  business so as to be exempt from a franchise or
  privilege tax.

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CAPITAL STOCK TAXES

• Most states have substituted their former taxes
  on a corporations capital for a tax on income.
  Neither North Dakota nor Minnesota impose a
  capital stock tax, but both have a corporate
  income tax.
• In North Dakota and Minnesota the beginning point
  in the computation of the corporate income tax
  is federal taxable income. From that amount
  several adjustments are provided in by
  57-38-01.3, NDCC. There are now 9 such
  adjustments.

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D.D.I., Inc v. STATE, 657 NW 2D 228 (ND 2000)

• One of the former adjustments to federal
  corporate income was a deduction for dividends
  paid if the income from which the dividends was
  derived was taxed in North Dakota. DDI received
  dividends from corporations outside of North
  Dakota. Originally, it claimed the dividends
  were not business income, but the tax
  commissioner required it to include them in North
  Dakota income. So, DDI brought a declaratory
  judgment action to challenged the provision.

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D.D.I CONCLUDED

• Both the trial court, Judge Wefald, and the North
  Dakota Supreme Court threw out North Dakotas
  deduction for such dividends because it
  discriminated against out of state dividend
  payors and hence violated the commerce clause.
  The exemption was only allowed if the dividend
  paying corporation was subject to North Dakota
  tax. Dividends received from other corporations
  were fully taxable.

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THE DIVISION OF THE TAX BASE

• There are three methods to divide the tax base
  among the states that can tax a business, to
  wit
• Allocation. This means that income is traced to
  the state by reason of where it is generated, or
  to the domicile of the taxpayer.
• Apportionment. This is the three-factor formula
  weve discussed, though one and two factor
  formulas are used in some states.
• Separate Accounting. This means that a separate
  income computation is made for each state under
  traditional accounting rules.

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ALLOCATION and APPORTIONMENT

• UDITPA employs both allocation and apportionment.
  57-38.1-05 provides for the allocation of
  rents. 57-38.1-06 provides for the allocation
  of capital gains. 57-38.1-07l provides for the
  allocation of interest and dividends while
  57-38.1-08 provides for the allocation of patent
  and royalty income.
• Business income is first allocated to North
  Dakota and then it is apportioned under the three
  factor formula. 57-38.1-09, et seq., NDCC. The
  complexity is in determining whether allocation
  items, like rent, dividends and capital gains
  might also be business income so as to be
  apportioned as well.

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SEPARATE ACCOUNTING

• This method, while it could be the most accurate,
  has lots of drawbacks. For example, a
  corporations home office is in South Dakota it
  sells a product to its North Dakota branch for
  100. Is that a fair price, especially where
  South Dakota has no income tax? The tendency
  would be to price the item very high, pulling the
  income into the tax free state. This issue is a
  constant problem in international taxation and is
  called transfer pricing.
• It is easy to cook the books under the separate
  accounting method. Tax commissioners nationwide
  uniformly refuse to accept this method except in
  the rare situation where it might provide more
  tax to that state.

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FARGO V. HART

• In this early case Indiana was attempting to levy
  a capital stock tax on the value of the American
  Express Company. As an aside, note that it was a
  Joint Stock company. What is that? 15.5
  million of its value consisted of bonds held in
  New York, its domicile, and Indiana included them
  in the tax base. Indiana apportioned the tax
  based on American Express transportation mileage
  in Indiana compared to its mileage everywhere. At
  that time the company was in the transportation
  business.
• The Supreme Court forbad the inclusion of the
  bonds as they were not used in the Indiana
  operation.

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NOTES AND QUESTIONS, P. 446

• The bonds were located in New York as that was
  American Express domicile.
• Had the 15.5 million been in horses wagons etc
  it would be included in the apportionment
  formula.
• Had the funds been needed for working capital
  they would be subject to apportionment. However,
  American Express had sufficient other working
  capital so the bonds were essentially just an
  investment.

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EXXON CORPORATION V WISCONSIN

• A landmark case, often cited. Exxon has three
  divisions extracting, refining and marketing of
  oil and gas products. Its only business in
  Wisconsin is marketing, and it filed state tax
  returns on a separate accounting basis which
  resulted in losses of about 4 million for the
  years involved. Wisconsin wants to apply the
  three factor formula to all of Exxons activities
  everywhere resulting in positive income of 4
  million for the years involved. Exxon claims
  that the state cannot tax its extraction and
  refining activities as they are not in the state.

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MORE EXXON

• This case applied the unitary-business concept,
  which was actually developed in the 19th century
  in the railroad industry. All of Exxons
  activities are unified so all states in which
  it has nexus have a crack at all its income, no
  matter how or where it arises. In a sense, there
  would no marketing in Wisconsin if Exxon did not
  extract and refine its products somewhere.
• Exxon had the burden of proving that its
  extraction and refining operations were discrete
  and separate business enterprises. It failed.

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EXXON AND THE UNITARY BUSINESS

• To apportion the income of an interstate or
  international business it is necessary that the
  business be unitary as opposed to a separate
  discrete business enterprise.
• The courts look to the underlying economic
  reality to determine if a business is unitary.
  The factors indicating a unitary business are a)
  centralized management, b) functional integration
  and c) economies of scale. You probably already
  suspect from such weasel words that the law
  defining unitary business is all over the map.

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ALLIED SIGNAL

• Allied signal had acquired Bendix corporation.
  Bendix had previously purchased ASARCO stock on
  the open market, eventually holding 20.6. Three
  years later Bendix sold the stock for a gain of
  211 million. Bendix has its headquarters in
  Michigan, and is in the business of manufacturing
  various products. Its primary business in New
  Jersey was the manufacture of aerospace products.
  ASARCO is a mining company and had no business
  relationship with Bendix.

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MORE BENDIX

• The stipulated facts showed no real connection
  between the two corporations, and Bendix had no
  control of ASARCO in any respect. Based on these
  facts the court held that the two corporations
  were not unitary, so that New Jersey could not
  include the 211 million gain on the sale of
  ASARCO stock in Bendixs income, subject to
  apportionment.
• However, the court noted that the gain could be
  apportioned if the investment served a
  operational function rather than merely being
  an investment. The court found that it was only
  an investment.

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BENDIX CONCLUDED

• Two important cases are cited in the opinion. In
  ASARCO, p. 456 (yes, it is the same company)
  the taxpayer bought 51.5 of a copper extracting
  company in Peru. It contracted away control of
  that company. Idaho tried to tax it on the
  income from Llama land but failed as ASARCO and
  the Peruvian company were found not unitary.
• In Woolworth p. 457 New Mexico tried to tax it
  on its income from foreign subsidiaries. Both the
  U.S and foreign corporations were in the retail
  store business. Inasmuch as those subs were
  operating independently of their parent they
  were found not unitary.

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HOW DOES CONTAINER CORPORATION FIT IN HERE?

• Container Corporation is found, in full, on page
  538 of our text. This opinion discusses the case
  on pp. 457-8. The facts in that case are much
  like Woolworth and ASARCO, but the court held
  that the corporations and its subsidiaries were
  unitary and permitted California to tax its
  world-wide income. The only connection between
  the parent and subs was advice, some debt and
  purchasing assistance, all of which could be
  changed at the whim of management. Are you
  confused? I am.

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WHAT IS REQUIRED TO DEMONSTRATE A SEPARATE
BUSINESS?

• The taxpayer must prove, by clear and cogent
  evidence that the sub or subs are engaged in a
  different business from their parent. Or, put
  the other way, here are the three objective
  tests to determine whether a business is
  unitary. The tests are
• 1. Does functional integration exist?
• 2. Is there centralization of management?
• 3. Are there economies of scale?
• You just have to love the judge who opined that
  these are objective tests.

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HOW WOULD BENDIXS GAIN BE TAXED UNDER UDITPA?

• Chapter 57-38.1, NDCC would apportion Bendixs
  capital gain to North Dakota if
• 1. The gain was from real property in this
  state.
• 2. Tangible personal property located in this
  state is sold.
• 3. Tangible personal property located anywhere
  is sold and the taxpayers commercial domicile is
  North Dakota, or
• 4. The gain is from the sale of an intangible and
  the taxpayers commercial domicile is North
  Dakota.

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