APPEAL FROM THE SUPREME COURT OF IDAHO.
Powell, J., delivered the opinion of the Court, in which Burger, C. J., and Brennan, White, Marshall, and Stevens, JJ., joined. Burger, C. J., filed a concurring opinion, post, p. 331. O'connor, J., filed a dissenting opinion, in which Blackmun and Rehnquist, JJ., joined, post, p. 331.
JUSTICE POWELL delivered the opinion of the Court.
The question is whether the State of Idaho constitutionally may include within the taxable income of a nondomiciliary
parent corporation doing some business in Idaho a portion of intangible income -- such as dividend and interest payments, as well as capital gains from the sale of stock -- that the parent receives from subsidiary corporations having no other connection with the State.
This case involves corporate income taxes that appellee Idaho State Tax Commission sought to levy on appellant ASARCO Inc. for the years 1968, 1969, and 1970. ASARCO is a corporation that mines, smelts, and refines in various States nonferrous metals such as copper, gold, silver, lead, and zinc. It is incorporated in New Jersey and maintains its headquarters and commercial domicile in New York. ASARCO's primary Idaho business is the operation of a silver mine. It also mines and sells other metals and operates the administrative office of its northwest mining division in Idaho. According to the appellee's tax calculations, approximately 2.5% of ASARCO's total business activities take place in Idaho. App. 59a, 67a, and 75a.
During the years in question, ASARCO received three types of intangible income of relevance to this suit.*fn1 First, it collected dividends from five corporations in which it owned major interests: M. I. M. Holdings, Ltd.; General Cable Corp.; Revere Copper and Brass, Inc.; ASARCO Mexicana, S. A.; and Southern Peru Copper Corp.*fn2 Second,
ASARCO received interest income from three sources: from Revere's convertible debentures; from a note received in connection with a prior sale of Mexicana stock; and from a note received in connection with a sale of General Cable Stock. Third, ASARCO realized capital gains from the sale of General Cable and M. I. M. stock.
In 1965, Idaho adopted its version of the Uniform Division of Income for Tax Purposes Act (UDITPA).*fn3 See Idaho Code § 63-3027 (1976 and Supp. 1981); 7A U. L. A. 91 (1978). Under this statute, Idaho classifies corporate income from intangible property as either "business" or "nonbusiness" income. "Business" income is defined to include income from intangible property when "acquisition, management, or disposition [of the property] [constitutes] integral or necessary parts of the taxpayers' trade or business operations."*fn4 Idaho apportions such "business" income according
to a three-factor formula and includes this apportioned share of "business" income in the taxpayer's taxable Idaho income.*fn5 "Nonbusiness" income, on the other hand, is defined as "all income other than business income." Idaho Code § 63-3027(a)(4) (Supp. 1981). Idaho allocates intangible "nonbusiness" income entirely to the State of the corporation's commercial domicile instead of apportioning it among the States in which a corporate taxpayer owns property or carries on business.*fn6
Idaho is a member of the Multistate Tax Compact, an interstate taxation agreement concerning state taxation of multistate businesses. The Compact established the Multistate Tax Commission, which is composed of the tax administrators
from the member States.*fn7 Article VIII of the Compact provides that any member State may request that the Commission perform an audit on its behalf. See United States Steel Corp. v. Multistate Tax Comm'n, 434 U.S. 452, 457 (1978) (upholding the Compact against a facial attack on Compact and Commerce Clauses and Fourteenth Amendment grounds).
In 1971, the Multistate Tax Commission audited ASARCO's tax returns for the years in question on behalf of six States, including Idaho. The auditor recommended adjusting ASARCO's tax computations in several respects. As accepted by the Idaho State Tax Commission and as relevant to the present dispute, the auditor first "unitized" -- or treated as one single corporation -- ASARCO and six of its wholly owned subsidiaries.*fn8 As a consequence of unitization, the auditor combined ASARCO's income with that of these six subsidiaries and disregarded (as intracompany accounting transfers) the subsidiaries' dividend payments to ASARCO. Cf. United States Steel Corp. v. Multistate Tax Comm'n, supra, at 473, n. 25. The auditor listed five factors thought to justify unitizing treatment. First, ASARCO
owned a majority (in fact, all) of the stock of each subsidiary. Second, "ASARCO, with its subsidiaries, conducts a vertically integrated non-ferrous metals operation. This is evidenced by the flow from the mines to the smelters to the refineries and ultimately to the sales made by the New York office." App. 88a. Third, "ASARCO and its subsidiaries have interlocking officers and directors, which enables ASARCO to control the major management decisions of each subsidiary." Ibid. Fourth, sales between the companies were numerous, making it "apparent . . . that the companies supplied markets to each other. . . ." Id., at 89a. And finally, various services were provided to the ASARCO group either by ASARCO or by subsidiaries specifically set up for such a purpose.*fn9 The propriety of this treatment of the six wholly owned subsidiaries is not an issue before us.
The auditor found the situation to differ with respect to ASARCO's interest in M. I. M., General Cable, Revere, Mexicana, and Southern Peru. This judgment planted the seed of the current dispute. As to these five companies, the auditor determined that the links with ASARCO were not sufficient to justify unitary treatment. Nonetheless, he found that ASARCO's receipt of dividends from each of these did constitute "business" income to ASARCO. See n. 4, supra. The auditor similarly classified the interest and capital gains income at issue in this case. These categories of income also were added in ASARCO's total income to be apportioned among the various States in which ASARCO was subjected to an income tax.
The Idaho State Tax Commission adopted the auditor's adjustments
in an unreported decision. App. to Juris. Statement 46a. In rejecting ASARCO's challenge to the auditor's unitized treatment of the six wholly owned corporations, see n. 8, supra, the Commission stated that it was "quite clear from the evidence produced at the hearing that [ASARCO's] business activities are so inter-related as to defy measurement by separate accounting. . . ." App. to Juris. Statement 49a-50a. The Commission likewise upheld the auditor's conclusion that the dividends presently at issue were properly treated as apportionable "business" income. It consequently assessed tax deficiencies against ASARCO of $92,471.88 for 1968, $111,292.44 for 1969, and $121,750.76 for 1970, plus interest.
On ASARCO's petition for review, the State District Court upheld the Commission's unitized treatment of the six subsidiaries in an unpublished opinion. The court, however, overruled the Commission's determination that the disputed dividends, interest, and capital gains constituted "business" income, on the reasoning that this income did not come from property or activities that were "an integral part of [ASARCO's] trade or business." Idaho Code § 63-3027(a)(1) (Supp. 1981). In the court's view, "if the dividend income from other corporations is an integral part of the business of [ASARCO] . . . they should be unitized and all matters considered and[,] if they are not[,] . . . the income is not business income but is [nonapportionable] non business income." App. to Juris. Statement 37a.
The Commission, but not ASARCO, appealed to the Idaho Supreme Court. That court held that the trial court had erred by excluding from "business" income ASARCO's receipt of dividends, interest, and capital gains as a result of its owning stock in the five corporations.*fn10 American Smelting Page 315} & Refining Co. v. Idaho State Tax Comm'n, 99 Idaho 924, 935-937, 592 P. 2d 39, 50-52 (1979). In response to ASARCO's constitutional arguments, the court decided that this tax treatment withstood attack under the Commerce and Due Process Clauses. We vacated and remanded the case for reconsideration in light of our decision in Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U.S. 425 (1980). ASARCO Inc. v. Idaho State Tax Comm'n, 445 U.S. 939 (1980). The Idaho Supreme Court reinstated its previous opinion in a brief per curiam order on March 4, 1981. 102 Idaho 38, 624 P. 2d 946. We noted probable jurisdiction, 454 U.S. 812 (1981), and we now reverse.
As a general principle, a State may not tax value earned outside its borders. See, e. g., Connecticut General Life Ins. Co. v. Johnson, 303 U.S. 77, 80-81 (1938).*fn11 The broad inquiry in a case such as this, therefore, is "whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits given by the state. The simple but controlling question is whether the state has given anything for which it can ask return." Wisconsin v. J. C. Penney Co., 311 U.S. 435, 444 (1940).
Our application of this general principle in this case is guided by two of our recent decisions. In Mobil Oil Corp. v. Commissioner of Taxes of Vermont, supra, the taxpayer conducted "an integrated petroleum business," 445 U.S., at
, that included international petroleum exploration, production, refining, transportation, distribution, and sale of petroleum, as well as related chemical and mining enterprises. Much of its business abroad was conducted through wholly or partly owned subsidiaries. The State of Vermont imposed a corporate income tax on that portion of Mobil's total income that the State attributed to Mobil's Vermont activity, which was confined to the wholesale and retail marketing of petroleum. The State sought to include within Mobil's apportionable Vermont income its receipt of dividends from its subsidiaries and affiliates that operated abroad. Mobil protested that the State could not properly apportion and tax this "foreign source" dividend income.
For present purposes, our analysis in Mobil began with the observation that Mobil's principal dividend payors were part of Mobil's integrated petroleum business. Although Mobil was "unwilling to concede the legal conclusion" that activities by these dividend payors formed part of Mobil's "'unitary business,'" it "offered no evidence that would undermine the conclusion that most, if not all, of its subsidiaries and affiliates [contributed] to [Mobil's] worldwide petroleum enterprise." Id., at 435.
The Court next stated that due process limitations on Vermont's attempted tax would be satisfied if there were "a 'minimal connection' between the interstate activities and the taxing State, and a rational relationship between the income attributed to the State and the intrastate values of the enterprise." Id., at 436-437, citing Moorman Mfg. Co. v. Bair, 437 U.S. 267, 272-273 (1978); National Bellas Hess, Inc. v. Illinois Dept. of Revenue, 386 U.S. 753, 756 (1967); Norfolk & Western R. Co. v. Missouri Tax Comm'n, 390 U.S. 317, 325 (1968). And we said that these limitations would not be contravened by state apportionment and taxation of income that were determined by geographic accounting to have arisen from a different State "so long as the intrastate and extrastate activities formed part of a single unitary business." 445 U.S., at 438 (emphasis added).
The Mobil Court explicated the limiting "unitary business" principle by observing that geographic accounting, in purporting to isolate income received in various States, "may fail to account for contributions to income resulting from functional integration, centralization of management, and economies of scale." Ibid. The fact that "these factors of profitability arise from the operation of the business as a whole," ibid., therefore could justify a State's otherwise impermissible inclusion of corporate income derived from corporate activities beyond the State's borders. The Court thus stated:
"[The] linchpin of apportionability in the field of state income taxation is the unitary-business principle. In accord with this principle, what appellant must show, in order to establish that its dividend income is not subject to an apportioned tax in Vermont, is that the income was earned in the course of activities unrelated to the sale of petroleum products in that State. [Mobil] has made no effort to demonstrate that the foreign operations of its subsidiaries and affiliates are distinct in any business or economic sense from its petroleum sales activities in Vermont. Indeed, all indications in the record are to the contrary, since it appears that these foreign activities are part of [Mobil's] integrated petroleum enterprise. In the absence of any proof of discrete business enterprise, Vermont was entitled to conclude that the dividend income's foreign source did not destroy the requisite nexus with in-state activities." Id., at 439-440 (emphasis added and footnote omitted).
We consequently rejected Mobil's constitutional challenge to Vermont's tax. In so doing, however, we cautioned that we did
"not mean to suggest that all dividend income received by corporations operating in interstate commerce is necessarily taxable in each State where that corporation does business. Where the business activities of the dividend payor have nothing to do with the activities of the
recipient in the taxing State, due process considerations might well preclude apportionability, because there would be no underlying unitary business." Id., at 441-442 (emphasis added).
We soon had occasion to reiterate these principles. Three months after Mobil, we decided Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S. 207 (1980). In Exxon, "a vertically integrated petroleum company," id., at 210, explored for, produced, refined, and marketed petroleum and related products. Although Exxon's activities in Wisconsin were confined to marketing, the State sought to apportion and tax Exxon's income from nonmarketing activities in the United States.
Exxon disputed the propriety of this treatment. The Wisconsin Tax Appeals Commission agreed with the objection on the basis of its conclusion that Exxon's "three main functional operating departments -- Exploration and Production, Refining, and Marketing -- were separate unitary businesses." Id., at 215 (emphasis added). The Commission found that the tax as applied "'had the effect of imposing a tax on [Exxon's] exploration and on its refining net income, all of which was derived solely from operations outside the State of Wisconsin and which had no integral relationship to [Exxon's] marketing operations within Wisconsin.'" Ibid. On appeal, however, the Circuit Court for Dane County held that Exxon's three main functional operating departments were all part of a single unitary business. The Wisconsin Supreme Court agreed.*fn12
In reviewing the case, this Court unanimously agreed with the State Commission and the two state courts that the decisive concept in the case was that of a unitary business. Significantly, we repeated Mobil 's teaching that "[the] 'linchpin of apportionability' for state income taxation of an interstate enterprise is the 'unitary-business principle.'" Id., at 223, quoting Mobil, 445 U.S., at 439. We also repeated:
"In order to exclude certain income from the apportionment formula, the company must prove that 'the income was earned in the course of activities unrelated to the sale of petroleum products in that State.' . . . The court looks to the 'underlying economic realities of a unitary business,' and the income must derive from 'unrelated business activity' which constitutes a 'discrete business enterprise,' 445 U.S., at 441, 442, 439." 447 U.S., at 223-224.
Examining the facts, the Court found that Exxon was "a highly integrated business which benefits from an umbrella of centralized management and controlled interaction." Id., at 224.*fn13 We rejected the company's protest because "[we] [agreed] with the Wisconsin Supreme Court that Exxon [was] such a unitary business and that Exxon has not carried
its burden of showing that its functional departments are 'discrete business enterprises'. . . ." Ibid.*fn14
In this case, ASARCO claims that it has succeeded, where the taxpayers in Mobil and Exxon failed, in proving that the dividend payors at issue are not part of its unitary business, but rather are "discrete business enterprises." 447 U.S., at 224. We must test this contention on the record before us.
The closest question is posed by ASARCO's receipt of dividends from Southern Peru. ASARCO is one of Southern Peru's four shareholders, holding 51.5% of its stock.*fn15
Southern Peru produces smelted but unrefined "blister copper" in Peru, and sells 20-30% of its output to the Southern Peru Copper Sales Corp.*fn16 The remainder of Southern Peru's output is sold under contracts to its shareholders in proportion to their ownership interests. Southern Peru sold about 35% of its output to ASARCO, App. 89a, at prices determined by reference to average representative trade prices quoted in a trade publication and over which the parties had no control.*fn17 Id., at 125a-126a; 99 Idaho, at 928, 592 P. 2d, at 43.
ASARCO's majority interest, if asserted, could enable it to control the management of Southern Peru. The Idaho State
Tax Commission, however, found that Southern Peru's "remaining three shareholders, owning the remainder of the stock, [refused] to participate in [Southern Peru] unless assured that they would have a way to assure that management would not be completely dominated by ASARCO." App. to Juris. Statement 55. Consequently ASARCO entered a management agreement giving it the right to appoint 6 of Southern Peru's 13 directors. The other three shareholders also appointed six directors. Ibid. The thirteenth and final director is appointed by the joint action of either the shareholders or the first 12 directors. Ibid.; App. 121a. Southern Peru's bylaws provide that eight votes are required to pass any resolution, ibid. and its articles and bylaws can be changed only by unanimous consent of the four stockholders.
In its unreported opinion, the state trial court concluded that this management contract "insures that [ASARCO] will not be able to control [Southern Peru]." App. to Juris. Statement 43a. It likewise found that Southern Peru "operates independently of [ASARCO]." Id., at 42a. The court reached this conclusion after hearing testimony that ASARCO did not "control Southern Peru in any sense of that term," App. 121a, and that Southern Peru did not "seek direction or approval from ASARCO on major decisions." Id., at 124a. Idaho does not dispute any of these facts. In view of the findings and the undisputed facts, we conclude that ...