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U.S. Supreme Court

Exxon Corp. v. Department of Rev. of Wisconsin, 447 U.S. 207 (1980)

Exxon Corp. v. Department of Rev. of Wisconsin

No. 79-509

Argued March 18, 1980

Decided June 10, 1980

447 U.S. 207


Appellant, a vertically integrated petroleum company doing business in several States, was organized, during the years in question in this case, into three levels of management, one of which was responsible for directing the operating activities of the company's functional departments. Transfers of products and supplies among the three major functional departments -- Exploration and Production, Refining, and Marketing -- were theoretically based on competitive wholesale prices. Appellant had no exploration and production or refining operations in Wisconsin and carried out only marketing in that State. During the years in question, appellant filed income tax returns in Wisconsin using a separate geographical system of accounting which reflected only the Wisconsin marketing operations and showed a loss for each year, thus resulting in no taxes being due, but appellee Wisconsin Department of Revenue, upon auditing the returns, assessed taxes, based on appellant's total income, pursuant to Wisconsin's tax apportionment statute. Ultimately, after appellant's application for abatement had proceeded through administrative and judicial review, the Wisconsin Supreme Court held that appellant's Wisconsin marketing operations were an integral part of one unitary business, and that therefore its total corporate income was subject to the statutory apportionment formula. The court further held that situs income derived from crude oil produced by appellant outside Wisconsin and transferred to its own refineries, and thus part of the unitary stream of income, was apportionable under the Wisconsin statute despite appellant's separate functional accounting system, and that taxation of such situs income did not impermissibly burden interstate commerce.


1. The Due Process Clause of the Fourteenth Amendment did not prevent Wisconsin from applying its statutory apportionment formula to appellant's total income. Pp. 447 U. S. 219-225.

(a) The Due Process Clause imposes two requirements for state taxation of the income of a corporation operating in interstate commerce: a "minimal connection" or "nexus" between the corporation's interstate activities and the taxing State, and "a rational relationship between the

Page 447 U. S. 208

income attributed to the State and the intrastate values of the enterprise." Mobil Oil Corp. v. Commissioner of Taxes, 445 U. S. 425, 445 U. S. 436-437. Such a nexus is established if the corporation "avails itself of the substantial privilege of carrying on business' within the State." Id. at 445 U. S. 437. Here, appellant concededly avails itself of that privilege through its marketing operations within Wisconsin. Pp. 447 U. S. 219-220.

(b) Appellant's use of separate functional accounting by which it shows what portion of its income is derived from exploration and production and from refining -- functions occurring outside Wisconsin -- does not demonstrate that application of the Wisconsin apportionment statute violated the Due Process Clause. A company's internal accounting techniques are not binding on a State for tax purposes, and are not required to be accepted as a matter of constitutional law for such purposes. Pp. 447 U. S. 220-223.

(c) The "linchpin of apportionability" for state income taxation of an interstate enterprise is the "unitary business principle." Mobil Oil Corp. v. Commissioner of Taxes, supra at 445 U. S. 439. If a company is a unitary business, then a State may apply an apportionment formula to the taxpayer's total income in order to obtain a "rough approximation" of the corporate income that is "reasonably related to the activities conducted within the taxing State." Moorman Mfg. Co. v. Bair, 437 U. S. 267, 437 U. S. 273. Here, the evidence fully supports the conclusion that appellant's marketing operations in Wisconsin were an integral part of such a unitary business. And appellant's use of separate functional accounting, and its decision for purposes of corporate accountability to assign wholesale market values to interdepartmental transfers of products and supplies, do not defeat the clear and sufficient nexus between appellant's interstate activities and the taxing State. Pp. 447 U. S. 223-225.

2. Similarly, the Due Process Clause did not preclude Wisconsin from subjecting to taxation under its statutory apportionment formula appellant's income derived from extraction of oil and gas located outside the State which was used by the Refining Department, and the State was not required to allocate such income to the situs State. There was a unitary stream of income, of which the income derived from internal transfers of raw materials from exploration and production to refining was a part. This was a sufficient nexus to satisfy the Due Process Clause, and there was also the necessary "rational relationship" between the income attributed to the State by the apportionment formula and the intrastate value of the business. Pp. 447 U. S. 225-227.

3. The Commerce Clause did not require Wisconsin to allocate all income derived from appellant's exploration and production function to the situs State, rather than include such income in the apportionment

Page 447 U. S. 209

formula. The Wisconsin taxing statute, as applied, did not subject interstate business to an unfair burden of multiple taxation. Mobil Oil Corp. v. Commissioner of Taxes, supra. The State sought to tax income, not property ownership, and it was the risk of multiple taxation that was being asserted, actual multiple taxation not having been shown. The Commerce Clause did not require that any income which appellant was able to separate through accounting methods and attribute to exploration and production of crude oil and gas be allocated to the States in which those production centers were located. The geographic location of such raw materials did not alter the fact that such income was part of the unitary business of appellant's interstate enterprise and was subject to fair apportionment among all States to which there was a sufficient nexus with the interstate activities. Pp. 447 U. S. 227-230.

90 Wis.2d 700, 281 N.W.2d 94, affirmed.

MARSHALL, J., delivered the opinion of the Court, in which all other Members joined except STEWART, J., who took no part in the consideration or decision of the case.

Page 447 U. S. 210

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