Supreme Court Upholds State Taxes Impacting Multinational Corporations

THE JOURNAL RECORD, June 21, 1994 | Go to article overview

Supreme Court Upholds State Taxes Impacting Multinational Corporations


WASHINGTON (AP) _ The U.S. Supreme Court allowed states Monday to tax multinational corporations in a way that has provoked other countries to threaten retaliation against U.S. businesses.

The decision affects both U.S.-based corporations with worldwide markets and foreign-based corporations that do business in this country.

The justices voted unanimously to uphold the aggressive way California taxed U.S.-based businesses, and split 7-2 in upholding how the state taxed foreign-based corporations.

In other business related cases, the court made it easier for airline and rail workers who are fired after reporting safety violations to challenge their dismissals. And it made it harder for coal miners and longshoremen or their families to collect disability or death benefits.

The foreign tax ruling took California off the hook _ the state won't have to refund an estimated $4 billion in taxes paid by multinational corporations under a so-called "unitary" tax formula.

A unitary tax treats a corporation, its subsidiaries and other far-flung activities as one entity. A state calculates the corporation's in-state business as a percentage of its worldwide business to come up with the company's tax liability to the state.

In contrast, the federal government and most other countries treat a multinational corporation's subsidiary as a separate company and tax only its income.

Congress has never banned states from using the controversial "unitary" taxing methods, Justice Ruth Bader Ginsburg noted for the court.

She said the challenge to California's tax "is directed to the wrong forum."

Jerome Libin, who represented the United Kingdom and 19 other countries in attacking the California law, said, "This case shows the reluctance of the current Supreme Court to involve itself in what it considers policy matters affecting foreign commerce."

He said the court "has very firmly placed the ball in Congress' hands."

Richard Ruda, chief counsel of the States and Local Legal Center, called the decision "a very important victory for the states."

"It allows them, if they choose, to use this tax until Congress says otherwise," Ruda said.

At least one member of Congress, Sen. Byron Dorgan, D-N.D., applauded the ruling.

"They were never attempting to overtax multinational corporations. They were using these taxes to make sure that multinational corporations were paying their fair share," he said.

The California tax had been challenged by the New York-based Colgate-Palmolive Co. and the British-owned Barclays Bank of California and Barclays Bank International. The companies sought refunds on state tax bills dating back to the 1970s.

Before last year, the unitary tax was mandatory. But California lawmakers voted last year to make the tax optional starting with the 1994 tax year. …

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