Metropolitan News-Enterprise


Friday, August 24, 2018


Page 5


Court of Appeal:

Disparate Tax-Filing Requirements Don’t Offend Commerce Clause

Fourth District Upholds Limiting Interstate Corporation With Subsidiaries to Reporting Total Income, With Apportionment of That Garnered in California, While Allowing In-State Companies a Choice of Methods


By a MetNews Staff Writer


The Fourth District Court of Appeal has rejected the contention by Harley-Davidson that California runs afoul of the federal constitutional Commerce Clause by allowing corporations with subsidiaries, operating only within the state, to take their choice of reporting the total taxes they owe or separately disclosing taxes due from each individual entity, while mandating that interstate enterprises, such as the plaintiff, file a combined report.

The motorcycle-maker contends that it has paid $1.9 million more in taxes by being forced to use the combined accounting method.

In an unpublished opinion by Justice Patricia Benke, Div. One on Wednesday affirmed a summary judgment granted by San Diego Superior Court Judge Joel M. Pressman in favor of the California Franchise Tax Board.

“The Harley-Davidson enterprise is comprised of commonly owned and functionally integrated businesses, each of which is dependent on or contributes to the operation of the entire business enterprise of the group,” Benke said, noting that such . “Such an enterprise is called a unitary business.”

Trial Court Order

Pressman, in his order granting summary to the tax board and denying Harley-Davidson’s cross-motion, explained:

“There are currently two methods for corporate tax payers to compute California tax: combined reporting  and separate reporting. Separate reporting is that each member of a unitary business files a report of all  its income and is taxed by California on that income without apportionment. Combined reporting allows  unitary businesses to file as a single business enterprise. For interstate filers, combined reporting is  required. Under the applicable provisions a unitary business files a combined report of all its income  from all sources, which is then apportioned using a formula to determine how much of the total business  income is attributable to California for tax purposes. Once the amount of business income apportionable  to California is determined, that amount is then apportioned among members of the unitary business  who are actually California taxpayers, to determine the tax liability of each of those entities.”

He declared that California “has a valid interest in preventing the manipulation and hiding of taxable income,” adding:

“There appears to be a legitimate  state interest in requiring this form of combined reporting to ensure that all business income from  interstate business is accurately accounted for that that it is fairly apportioned. The state has a valid  interest in preventing the manipulation and hiding of taxable income….

“There does not appear to be a reasonable nondiscriminatory alternative that would adequately serve the  state’s interest. The alternative of allowing separate reporting for out of state business would potentially  omit income of certain entities doing business outside the state.”

Benke’s Opinion

Benke wrote:

“After independent review, we also find that there is a legitimate state interest to require combined reporting of taxable income of interstate unitary businesses, to accurately measure and tax all income attributable to California, that outweighs any possible discriminatory effect.”

Benke noted that in 1972, the Court of Appeal in Handlery v. Franchise Tax Board upheld the requirement, then in place, that an intrastate unitary business report income of each of its subsidiaries separately. The Legislature responded in 1980, she recited, by amending the Revenue and Taxation Code to permit in-state companies to report one combined sum or to provide returns for each subsidiary.

The jurist observed that the U.S. Supreme Court has “long upheld the constitutionality” of states requiring combined reports. Pointing to what is different in the present case, she said Harley-Davidson was complaining that intrastate companies with subsidiaries have a choice in how to report income while interstate companies don’t, and that “this differential treatment of interstate and intrastate unitary enterprises violates the commerce clause.”

Harley-Davidson insisted that the Court of Appeal in 2015, in Harley-Davidson I, held that Revenue and Taxation Code §25101.15, mandating an interstate unified business employ the combined accounting method, impermissibly discriminates against interstate commerce. Benke responded:

“We found that this provision of California’s tax system treats intrastate and interstate unitary businesses differently, but we made no finding on whether that differential treatment was discriminatory….We found only that Harley-Davidson adequately alleged that this differential treatment was discriminatory because it benefitted intrastate unitary businesses and burdened interstate unitary businesses….A demurrer must be denied where the plaintiff has alleged facts that, if true, would state a valid cause of action.”

In its complaint, Harley-Davidson contended that allowing use of the separate returns by subsidiaries of businesses operating only within California’s borders, the state was giving a competitive advantage to those concerns by enabling “the ability to more efficiently use credits and net operating losses, reduced tax burden, increased administrative ease and lower compliance costs in preparing returns.”

The case is Harley-Davidson, Inc. & Subsidiaries v. California Franchise Tax Board, D071669.


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