Moorman Manufacturing Co. v. Bair
437 U.S. 267, 1978 U.S. LEXIS 111, 98 S. Ct. 2340 (1978)
Rule of Law:
A state's single-factor sales apportionment formula for corporate income tax does not violate the Due Process Clause or the Commerce Clause simply because it may lead to some extraterritorial taxation or potential duplicative taxation, unless the taxpayer provides clear and cogent evidence that the income attributed to the state is out of all appropriate proportion to the business transacted in that state or results in a grossly distorted result.
Facts:
- Moorman Manufacturing Co. (Moorman) is an Illinois corporation engaged in the manufacture and sale of animal feeds.
- Moorman's products sold to Iowa customers are manufactured in Illinois.
- Moorman has over 500 salesmen in Iowa and owns six warehouses in the State from which deliveries are made to Iowa customers.
- Iowa sales account for about 20% of Moorman's total sales.
- Iowa imposes an income tax on corporations doing business in the state, taxing the portion of income "reasonably attributable" to business within the State.
- Iowa's statutory formula for apportioning income derived from the manufacture or sale of tangible personal property uses a single-factor sales formula (ratio of gross sales in Iowa to total gross sales).
- The Iowa statute allows taxpayers to file objections and propose an alternative method of apportionment if the statutory formula is deemed "inapplicable and inequitable."
- During fiscal years 1949 through 1960, the Iowa State Tax Commission allowed Moorman to compute its Iowa income using a three-factor formula (property, payroll, and sales) rather than the statutory single-factor formula.
Procedural Posture:
- The Iowa Director of Revenue revised Moorman's tax assessment for fiscal years 1968 through 1972, based on the statutory single-factor formula, which produced a higher percentage of taxable income than Moorman had reported.
- The Iowa Tax Commission rejected Moorman’s appeal from the revised assessment.
- Moorman challenged the constitutionality of the single-factor formula in the Iowa District Court for Polk County, which held the formula invalid under the Due Process Clause of the Fourteenth Amendment and the Commerce Clause.
- The Supreme Court of Iowa reversed, holding that an apportionment formula is not subject to constitutional attack unless the taxpayer proves that the formula has produced an income attribution "out of all proportion to the business transacted" within the State, concluding that Moorman had not made such a showing.
- The Supreme Court of the United States noted probable jurisdiction of Moorman’s appeal.
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Issue:
Does the Commerce Clause or the Due Process Clause of the Fourteenth Amendment prohibit a state's use of a single-factor sales formula to apportion the income of an interstate business for state income tax purposes, especially when most other states use a three-factor formula?
Opinions:
Majority - Mr. Justice Stevens
No, the single-factor sales formula employed by Iowa to apportion the income of an interstate business for income tax purposes is not prohibited by the Federal Constitution. Regarding the Due Process Clause, the Court reiterated two restrictions on state power to tax interstate businesses: a minimal connection between activities and the taxing state, and that attributed income must be rationally related to "values connected with the taxing State." Moorman plainly satisfied the minimal connection requirement. The Court emphasized that apportionment formulas are inherently rough approximations and rejected the notion that the Constitution invalidates a formula whenever it might result in taxation of some income not sourced in the taxing state. Single-factor formulas are presumptively valid, as established in cases like Underwood Typewriter Co. v. Chamberlain. To overcome this presumption, a taxpayer must prove by "clear and cogent evidence" that the formula produced an income attribution "out of all appropriate proportions to the business transacted" in that state or led to a "grossly distorted result." Moorman failed to make such a showing, as it did not present separate accounting analyses or other evidence to prove the formula was arbitrary or produced an unfair result in its specific case. The Court distinguished General Motors Corp. v. District of Columbia as a statutory interpretation case, not a constitutional one concerning the validity of a sales-factor-alone formula. Regarding the Commerce Clause, the Court found Moorman failed to establish the essential factual predicate for a claim of duplicative taxation; the record did not show whether Iowa and Illinois together taxed more than 100% of its net income. Even assuming some overlap, the Court would not necessarily fault Iowa's formula over Illinois'. The Commerce Clause does not implicitly require states to adopt a uniform apportionment formula, such as the three-factor formula used by most states, to avoid potential duplicative taxation. Mandating uniform rules for the division of income would require "extensive judicial lawmaking," which involves policy decisions based on varying political and economic considerations that are best left to Congress. The Constitution is neutral as to the content of any uniform rule. The Court concluded that until Congress prescribes a different rule, Iowa is not constitutionally prohibited from requiring taxpayers to prove that the single-factor formula has produced arbitrary results in a particular case. Furthermore, Iowa's income tax, which taxes only profitable enterprises, was deemed less burdensome than a plainly valid gross-receipts tax, which applies regardless of profit.
Dissenting - Mr. Justice Brennan
Yes, Iowa’s single-factor sales-apportionment formula fails to meet the Commerce Clause requirement that a State’s taxation of interstate business must be "fairly apportioned to the commerce carried on within the taxing state." Justice Brennan agreed with the majority that there is no constitutional distinction between a corporate income tax and a gross-receipts tax for purposes of review. However, he maintained that where a sale involves significant contacts with more than one State, it is the commercial activity within the State, not merely the sales volume, that determines the State’s power to tax and by which the tax must be apportioned. He reiterated his view that if commercial activity in more than one State leads to a sale in one, that State may not claim all gross receipts to which its activity contributed only a part. Such a tax, he argued, must be apportioned to reflect the business activity within the taxing State, which Iowa's single-factor sales formula, in his view, failed to do.
Dissenting - Mr. Justice Blackmun
Yes, Iowa’s now anachronistic single-factor sales formula runs headlong into overriding Commerce Clause considerations and demands. Justice Blackmun joined Justice Powell's dissenting opinion, agreeing that the Court has a duty to resolve these problems of "delicate adjustment" in state taxation. He asserted that the majority's decision is regressive, as single-factor formulas are relics from early state income taxation, while three-factor formulas are improvements that more accurately reflect business realities. With the almost universal adoption of three-factor formulas by other states, Iowa's system creates an adverse and parochial impact on commerce. He expressed concern that upholding Iowa's formula would provide little reason for other states to not revert to older, less equitable methods, thereby exacerbating the very issues the Commerce Clause was designed to prevent in the absence of congressional action.
Dissenting - Mr. Justice Powell
Yes, Iowa’s use of a single-factor sales formula to apportion the net income of multistate corporations results in the imposition of "a tax which discriminates against interstate commerce ... by providing a direct commercial advantage to local business." Justice Powell agreed with the majority that the application of Iowa's formula does not violate the Due Process Clause, acknowledging that arithmetical perfection is not expected and that Moorman failed to show a "grossly distorted result." However, he found that the Commerce Clause was violated. Iowa's single-factor sales-apportionment formula, though facially neutral, operates as a tariff on goods manufactured in other States and a subsidy to Iowa manufacturers selling goods outside Iowa. Because 44 of the 45 other states imposing corporate income taxes use a three-factor formula (property, payroll, and sales), Iowa's practice results in higher total tax payments for out-of-state businesses selling in Iowa. This occurs because Iowa attributes all income from sales in Iowa to itself, while other states also tax some portion of that income based on property or payroll within their borders. This effect penalizes out-of-state manufacturers for selling in Iowa and subsidizes Iowa manufacturers for selling elsewhere. Justice Powell cited the basic Commerce Clause principle that states cannot use taxing powers to establish economic barriers against competition from other states' products. He argued this ban applies even to facially neutral taxes that, in their practical operation, discriminate against interstate commerce. He distinguished prior cases upholding single-factor formulas (e.g., Underwood Typewriter Co., Bass, Ratcliff & Gretton, Ltd., Ford Motor Co.) because they did not involve a context of "virtually universal use of a conflicting type of formula." In contrast, Iowa's formula stands significantly "out of line" with prevalent practices, similar to regulatory conflicts struck down in cases like Southern Pacific Co. v. Arizona and Bibb v. Navajo Freight Lines, Inc. He also referenced General Motors Corp. v. District of Columbia, which noted that a single-factor sales formula, in the context of general three-factor use, can lead to multiple taxation and an unhealthy fragmentation of enterprise. He concluded that since Iowa’s formula inevitably discriminates against out-of-state sellers and was not justified on any fiscal or administrative basis, it should be held invalid under the Commerce Clause.
Analysis:
This case affirms the long-standing principle that states possess broad discretion in selecting income apportionment formulas for interstate businesses. The Court emphasized that taxpayers bear a heavy burden to prove actual economic distortion under the Due Process Clause or discriminatory burdens under the Commerce Clause. By deferring to Congress to establish uniform rules for interstate taxation, the ruling highlights judicial reluctance to engage in "extensive judicial lawmaking" on complex economic policy issues. This approach provides states considerable flexibility in designing their tax schemes, even when they differ from a majority of other states, as long as they meet minimum constitutional standards and are not clearly and cogently proven to be arbitrary or grossly distorted in application.
