The Role of Congressional Silence in a Foreign Commerce Clause Analysis: The Example of Barclays Bank and the Unitary Taxation of Foreign-Parent Corporations

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I. Introduction

The Barclays Bank case is likely to be the final part of the U.S. Supreme Court's effort to piece together a constitutional analysis applicable to the unitary taxation of foreign-parent multinational corporations (MNCs).(1) At stake is current Foreign Commerce Clause doctrine as it applies to the unitary taxation of foreign-parent MNCs not only in Barclays Bank, but also in future cases likely to be brought in other states.(2) If the Supreme Court finds that unitary taxation is unconstitutional, California could lose up to $4 billion at a time when it faces a severe budget crisis.(3) At least fourteen other states face the possibility of losing large amounts of past and future tax revenue.(4) The case will also affect international economic relations between the United States and its primary trading partners, most notably the United Kingdom.(5) The Barclays Bank case, therefore, involves far-reaching policy issues, both domestic and international.

Unitary taxation is one of two methodologies that states use to determine an MNC's in-state taxable income. The other and more popular method is the arm's length/separate accounting (AL/SA) method.(6) The AL/SA method distinguishes between parent corporations and their affiliates, and treats the income of affiliates as separate from that of the parent if the two entities deal with each other at arm's length.(7) States using the less popular unitary approach, on the other hand, combine an MNC's worldwide earnings, including the earnings of its domestic and foreign subsidiaries, and then apply a formula to determine the portion of income attributable to the state.(8) States use unitary taxation primarily to prevent transfer pricing, which MNCs use to minimize tax liability,(9) and to capture fully the benefits of integration and economies of scale that often escape the AL/SA methodology.(10) The use of unitary taxation, therefore, typically generates substantially more tax revenue than does the AL/SA method."(11)

Beginning in the late 1970s, MNCs challenged the states' use of various taxing devices designed to increase state revenue.(12) The MNCs' primary target was the states' application of formula apportionment and unitary taxation to MNCs.(13) The arguments challenging formula apportionment typically rested on two constitutional premises: the dormant Foreign Commerce Clause and the Due Process Clause.(14) Thus far, neither doctrinal approach has been successful in barring the application of formula apportionment to unitary businesses.(15)

Constitutional challenges to state income taxation of MNCs have focused particularly on California's use of unitary taxation.(16) U.S.-parent MNCs doing business in California failed to overthrow California's taxing scheme, despite the recent attempt to do so in Container Corp.(17) When the U.S. Supreme Court resolved the U.S.-parent corporation issue in Container Corp., however, it explicitly left open the question of whether California's application of unitary taxation to foreign-parent MNCs violates the Constitution.(18) After overcoming procedural barriers,(19) foreign-parent MNCs began their attack on California's use of unitary taxation.(20) In 1992 the California courts temporarily filled the gap left open by the U.S. Supreme Court in Container Corp. by upholding the constitutionality of unitary taxation as applied to foreign-parent MNCs.(21)

This Note focuses on the constitutional analysis that the California courts employed in the Barclays Bank case. Part II sets forth the doctrinal background of the U.S. Supreme Court's treatment of formula apportionment and the California courts' disposition of the constitutional issues in Barclays Bank. Part III critically analyzes the California courts' use of Wardair to infer congressional acquiescence in the use of unitary taxation, thus circumventing a dormant Foreign Commerce Clause analysis. Part IV places the doctrinal discussion of congressional silence in the context of recent domestic and international developments. …