Taxation and State Taxation -- 2000
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Hunt-Wesson, Inc. v. Franchise Tax Board
(U.S. Supreme Court)
Taxation of nonunitary subsidiaries
California’s unitary tax system allows a multistate corporation to deduct interest expense. However, it limits that deduction to the amount that the interest expense exceeds certain out-of-state income arising from the unrelated business activity of a discrete business enterprise. The Court has already held that income derived from the unrelated business activity cannot be taxed by the state consistent with the Due Process and Commerce Clauses, and today, it held that the California limit on interest-expense deduction is likewise unconstitutional: "Because California’s offset provision is not a reasonable allocation of expense deductions to the income that the expense generates, it constitutes impermissible taxation of income outside its jurisdictional reach." The decision, authored by Justice Breyer, was unanimous.
Lower court opinion: Cal. Ct. App. (Dec. 11, 1998) (unpublished)
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