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MOORMAN MANUFACTURING CO. v. BAIR,
DIRECTOR OF REVENUE OF IOWA

APPEAL FROM THE SUPREME COURT OF IOWA

No. 77-454. Argued March 21, 1978-Decided June 15, 1978

An Iowa statute prescribes a so-called single-factor sales formula for apportioning an interstate corporation's income for state income tax purposes. Under this formula, the part of income from such a corporation's sale of tangible personal property attributable to business within the State and hence subject to the state income tax is deemed to be in that proportion which the corporation's gross sales made within the State bear to its total gross sales. Appellant, an Illinois corporation that sells animal feed it manufactures in Illinois to Iowa customers through Iowa salesmen and warehouses, brought an action in an Iowa court challenging the constitutionality of the single-factor formula. The trial court held the formula invalid under the Due Process Clause of the Fourteenth Amendment and the Commerce Clause, but the Iowa Supreme Court reversed. Held:

1. Iowa's single-factor formula is not invalid under the Due Process Clause. Pp. 271–275.

(a) Any assumption that at least some portion of appellant's income from Iowa sales was generated by Illinois activities is too speculative to support a claim that Iowa in fact taxed profits not attributable to activities within the State. P. 272.

(b) An apportionment formula, such as the single-factor formula, that is necessarily employed as a rough approximation of a corporation's income reasonably related to the activities conducted within the taxing State will only be disturbed when the taxpayer has proved by "clear and cogent evidence" that the income attributed to the State is in fact "out of all reasonable proportion to the business transacted. . . in that State," Hans Rees' Sons v. North Carolina ex rel. Maxwell, 283 U. S. 123, 135, or has "led to a grossly distorted result," Norfolk & Western R. Co. v. State Tax Comm'n, 390 U. S. 317, 326. Here, the Iowa statute afforded appellant an opportunity to demonstrate that the single-factor formula produced an arbitrary result in its case, but the record contains no such showing. Pp. 272-275.

2. Nor is Iowa's single-factor formula invalid under the Commerce Clause. Pp. 276-281.

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(a) On this record, the existence of duplicative taxation as between Iowa and Illinois (which uses the so-called three-factor-property, payroll, and sales-formula) is speculative, but even assuming some overlap, appellant's argument that Iowa, rather than Illinois, was necessarily at fault in a constitutional sense cannot be accepted. Where the record does not reveal the sources of appellant's profits, its Commerce Clause claim cannot rest on the premise that profits earned in Illinois were included in its Iowa taxable income and therefore the Iowa formula was at fault for whatever overlap may have existed. Pp. 276-277.

(b) The Commerce Clause itself, without implementing legislation by Congress, does not require, as appellant urges, that Iowa compute corporate net income under the Illinois three-factor formula. If the Constitution were read to mandate a prohibition against any overlap in the computation of taxable income by the States, the consequences would extend far beyond this particular case and would require extensive judicial lawmaking. Pp. 277-281.

254 N. W. 2d 737, affirmed.

STEVENS, J., delivered the opinion of the Court, in which BURGER, C. J., and STEWART, WHITE, MARSHALL, and REHNQUIST, JJ., joined. BRENNAN, J., post, p. 281, and BLACKMUN, J., post, p. 282, filed dissenting opinions. POWELL, J., filed a dissenting opinion, in which BLACKMUN, J., joined, post, p. 283.

Donald K. Barnes argued the cause for appellant. With him on the briefs were Walter R. Brown, John V. Donnelly, Carl G. Schmiedeskamp, and Robert W. Cook.

Harry M. Griger, Assistant Attorney General of Iowa, argued the cause for appellee. With him on the brief was Richard C. Turner, Attorney General.*

*Ernest S. Christian, Jr., and Allan Abbot Tuttle filed a brief for the Committee on State Taxation of the Council of State Chambers of Commerce as amicus curiae urging reversal.

James L. Rogers, John R. Phillips, and Philip B. Kurland filed a brief for the Iowa Manufacturers Assn. et al. as amici curiae urging affirmance. Willam D. Dexter, James A. Redden, Attorney General of Oregon, and Theodore W. de Looze, Assistant Attorney General, filed a brief for the Multistate Tax Comm'n et al. as amici curiae.

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MR. JUSTICE STEVENS delivered the opinion of the Court. The question in this case is whether the single-factor sales formula employed by Iowa to apportion the income of an interstate business for income tax purposes is prohibited by the Federal Constitution.

I

Appellant, Moorman Manufacturing Co., is an Illinois corporation engaged in the manufacture and sale of animal feeds. Although the products it sells to Iowa customers are manufactured in Illinois, appellant has over 500 salesmen in Iowa and it owns six warehouses in the State from which deliveries are made to Iowa customers. Iowa sales account for about 20% of appellant's total sales.

Corporations, both foreign and domestic, doing business in Iowa are subject to the State's income tax. The taxable income for federal income tax purposes, with certain adjustments, is treated as the corporation's "net income" under the Iowa statute. If a corporation's business is not conducted entirely within Iowa, the statute imposes a tax only on the portion of its income "reasonably attributable" to the business within the State.

There are essentially two steps in computing the share of a corporation's income "reasonably attributable" to Iowa. First, certain income, "the geographical source of which is easily identifiable," is attributed entirely to a particular State.1

1 The statute provides:

"Interest, dividends, rents, and royalties (less related expenses) received in connection with business in the state, shall be allocated to the state, and where received in connection with business outside the state, shall be allocated outside of the state." Iowa Code § 422.33 (1)(a) (1977). In describing this section, the Iowa Supreme Court stated that "certain income, the geographical source of which is easily identifiable, is allocated to the appropriate state." 254 N. W. 2d 737, 739. Thus, for example, rental income would be attributed to the State where the property was located. And in appellant's case, this section operated to exclude its investment income from the tax base.

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Second, if the remaining income is derived from the manufacture or sale of tangible personal property, "the part thereof attributable to business within the state shall be in that proportion which the gross sales made within the state bear to the total gross sales." This is the single-factor formula that appellant challenges in this case.

2

If the taxpayer believes that application of this formula subjects it to taxation on a greater portion of its net income than is "reasonably attributable" to business within the State, it may file a statement of objections and submit an alternative method of apportionment. If the evidence submitted by the taxpayer persuades the Director of Revenue that the statute is "inapplicable and inequitable" as applied to it, he may recalculate the corporation's taxable income.

3

During the fiscal years 1949 through 1960, the State Tax Commission allowed appellant to compute its Iowa income on the basis of a formula consisting of three, equally weighted factors-property, payroll, and sales-rather than the formula prescribed by statute. For the fiscal years 1961 through 1964, appellant complied with a directive of the State Tax Commission to compute its income in accordance with the statutory formula. Since 1965, however, appellant has resorted to the three-factor formula without the consent of the commission.

In 1974, the Iowa Director of Revenue revised appellant's tax assessment for the fiscal years 1968 through 1972. This assessment was based on the statutory formula, which pro

2 Iowa Code § 422.33 (1)(b) (1977).

3 The operation of the two formulas may be briefly described. The single-factor sales formula yields a percentage representing a ratio of gross sales in Iowa to total gross sales. The three-factor formula yields a percentage representing an average of three ratios: property within the State to total property, payroll within the State to total payroll, and sales within the State to total sales.

These percentages are multiplied by the adjusted total net income to arrive at Iowa taxable net income. This net income figure is then multiplied by the tax rate to compute the actual tax obligation of the taxpayer.

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duced a higher percentage of taxable income than appellant, using the three-factor formula, had reported on its return in each of the disputed years. The higher percentages, of course, produced a correspondingly greater tax obligation for those years."

After the Tax Commission had rejected Moorman's appeal from the revised assessment, appellant challenged the constitutionality of the single-factor formula in the Iowa District Court for Polk County. That court 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 that is necessarily only a rough approximation of the income properly attributable to the taxing State 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. The court concluded that appellant had not made such a showing.

We noted probable jurisdiction of Moorman's appeal, 434 U. S. 953, and now affirm.

II

Appellant contends that Iowa's single-factor formula results in extraterritorial taxation in violation of the Due Process

For those years the two formulas resulted in the following percentages:

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For a description of how these percentages are computed, see n. 3, supra.

Thus, in 1968, for example, Moorman's three-factor computation resulted in a tax of $81,466, whereas the Director's single-factor computation resulted in a tax of $121,363.

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