Exxon Corp. v. Department of Revenue of Wis.
447 US 207, 65 L. Ed. 2d 66, 1980 U.S. LEXIS 47 (1980)
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Rule of Law:
The Due Process and Commerce Clauses do not prevent a state from taxing a fairly apportioned share of the total income of a vertically integrated, multistate corporation when the corporation's in-state activities are part of a single 'unitary business,' even if the out-of-state income is derived from different functional operations like production and refining.
Facts:
- Exxon Corp. was a vertically integrated petroleum company with three main functional departments: Exploration and Production, Refining, and Marketing.
- For internal accounting purposes, Exxon treated these departments as separate profit centers, with transfers of products between them based on competitive wholesale market prices.
- Within Wisconsin, Exxon's only business activity was the marketing and sale of petroleum products; it conducted no exploration, production, or refining in the state.
- The gasoline Exxon sold in Wisconsin was not produced by Exxon but was acquired from another company under an exchange agreement negotiated by its central management.
- Despite the functional separation, Exxon operated under centralized management that provided corporate services, coordinated operations, and managed a uniform nationwide brand, credit card system, and marketing plan.
Procedural Posture:
- For tax years 1965-1968, Exxon Corp. filed Wisconsin tax returns based on separate accounting for its in-state marketing operations, reporting losses and no tax due.
- The Wisconsin Department of Revenue audited Exxon, determined its operations constituted a single unitary business, and applied the state's apportionment formula to Exxon's total corporate income, resulting in a notice of assessment for additional taxes.
- Exxon's application for abatement was denied by the Department.
- Exxon appealed to the Wisconsin Tax Appeals Commission, which held that Exxon's functional departments were separate businesses and Wisconsin could only tax income from the marketing function.
- On review, the Circuit Court for Dane County reversed the Commission, holding that Exxon was a unitary business but that income from oil and gas production must be allocated to the situs state and excluded from apportionment.
- The Wisconsin Supreme Court affirmed the finding of a unitary business but reversed the exclusion of production income, holding that all income from the unitary business was subject to apportionment.
- Exxon appealed to the U.S. Supreme Court, which noted probable jurisdiction.
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Issue:
Does Wisconsin's statutory apportionment formula, when applied to the total income of a vertically integrated petroleum company that only conducts marketing operations within the state, violate the Due Process Clause or the Commerce Clause of the U.S. Constitution by taxing income generated from the company's out-of-state exploration, production, and refining operations?
Opinions:
Majority - Justice Marshall
No, Wisconsin's application of its apportionment formula to Exxon's total income does not violate the Due Process or Commerce Clauses. The 'linchpin of apportionability' is the unitary-business principle, which allows a state to tax a 'rough approximation' of the corporate income reasonably related to activities within the taxing state. Exxon's separate functional accounting is not binding for tax purposes because it may fail to account for contributions to income from functional integration, centralized management, and economies of scale. The court found that Exxon's Wisconsin marketing operations were an integral part of a unitary business, as they provided an essential outlet for the company's production and refining operations, which in turn benefited from the stable demand. Because Exxon's marketing, refining, and production activities constituted a single integrated business, Wisconsin had the requisite nexus to tax a fairly apportioned share of the entire enterprise's income, and doing so did not lead to a grossly distorted result or create an unconstitutional risk of multiple taxation.
Analysis:
This decision solidifies the power of states to tax the worldwide income of multinational and multistate corporations under the 'unitary business' principle. It establishes that a company's internal accounting, which may separate profits by function or geography, is not controlling for constitutional tax purposes. The ruling significantly limits a company's ability to isolate its profitable activities (like resource extraction) from its less profitable in-state activities (like marketing) to reduce its state tax liability. This precedent provides a crucial tool for states to capture revenue from vertically integrated enterprises that benefit from the state's market, even if the bulk of their income-producing assets are located elsewhere.
