On Nov. 13, 2007, the NAM joined with the Council on State Taxation (“COST”) in an amicus brief urging the Supreme Court to overturn an Illinois decision that would subject businesses to unfair and duplicative taxation by multiple states on the same income.
MeadWestvaco’s predecessor, Mead (headquartered in Ohio), acquired the company now known as LexisNexis (another Ohio corporation) for $6 million in 1968, although it allowed LexisNexis to run as an independent business for 26 years, providing cash infusions, profit investment, and oversight rather than hands-on management. After selling Lexis-Nexis for approximately $1.5 billion in 1994, Mead reported the sales gain on its Illinois corporate tax return as non-business investment income. The Illinois Department of Revenue believed Mead should have classified the LexisNexis sale as business income “apportionable” to Illinois and found that Mead owed approximately $3.1 million in Illinois income tax and $1 million in interest. Although a state is not permitted under the Constitution to tax corporate earnings made in other jurisdictions, a state may tax a portion of earnings made within its boundaries. To meet this constitutional requirement, Illinois employs an “apportionment” method to tax the portion of a company’s earnings that can be attributed to Illinois transactions. States generally cannot tax companies incorporated in another state for capital transactions like the sale of an asset, because such transactions do not have the required connection to the state, unless the asset sold served an “operational” rather than an “investment” function.
Mead sought injunctive and declaratory relief in Illinois state court, based on its belief that LexisNexis was a company “investment,” not an “operational” part of its business that would be subject to Illinois taxes. The trial court held, and was affirmed on appeal, that Mead failed to satisfy its burden of proving LexisNexis was not an “operational” asset and thus should have classified the sale as apportionable business income.
Our brief argues that Illinois’ attempt to tax the gain from the sale of LexisNexis, which had functioned as an independent business, conflicts with the decision in Allied-Signal, Inc. v. Director, Div. of Taxation, 504 U.S. 768 (1992), where the Court established that an asset was “operational” only if it was utilized directly in the selling company’s business or was a short-term investment designed to raise cash for daily operating expenses.
Our brief warns that if this decision is affirmed by the Supreme Court, companies are more likely to face out-of-state taxation when they sell assets that might be characterized as serving an operational function, as opposed to simply being an investment.
On April 15, 2008, the Court reversed and remanded the case. It ruled that the lower court erred in considering whether Lexis served an operational purpose in Mead's business after determining that Lexis and Mead were not a unitary business. Instead, the lower court should recognize that a corporate asset could be part of a unitary business if it serves an operational rather than an investment function, and could be taxed by various states as part of the company's unitary business. An asset can be a part of a unitary business even without a payor-to-payee relationship between the owner of the asset and the company that the state wants to tax. The trial court found that Lexis was not a unitary part of Mead's business, but the appeals court reserved that question, so the Supreme Court sent the case back for reconsideration in light of its new guidance.
This decision purports to clarify how to determine whether an asset should be considered part of a unitary business and therefore subject to apportioned taxation by any state where the unitary business does business.