The Supreme Court ruled yesterday that the state of Wisconsin may tax income Exxon Corp. earns from oil and gas production and refining even though all it does in the state is market petroleum products.
The decision extends the right of states to tax integrated oil companies beyond that laid out in a major decision in March in which the court held Vermont could count as income and tax dividends received by Mobil Corp. even if from foreign subsidiaries.
Mobil, like Exxon, had neither oil or gas exploration and production activities, nor refinery operations, in the state seeking to levy the tax.
It has long been permissable for a state to tax a multi-state corporation's total income if it is engaged in a "unitary business," and if the state uses a formula for apportioning income that is related fairly to the amount of business the corporation does within its borders.
Exxon argued it kept its own books separately for its exploration and production, refining, and marketing operations. Since it conducted only marketing operations in Wisconsin, the income of that part of the company was all the state could fairly tax, it said.
The court saw it differently. "We agree with the Wisconsin Supreme Court that Exxon is a unitary business and that Exxon has not carried its burden of showing that its functional departments are discrete business enterprises whose income is beyond the apportionment statute of the state," wrote Justice Thurgood Marshall for a unanimous court.
"While Exxon may treat its operational departments as independent profit centers, it is nonetheless true that this case involves a highly integrated business which benefits from an umbrella of centralized management and controlled interaction," the opinion continued.
The case covered four years, from 1965 through 1968, and involved an added tax of $316,470.85 on income of $4,532,155. The returns originally filed by Exxon showed losses averaging nearly $1 million annually for the four years, and therefore no tax due.
Marshall and the court rejected the company's claim that income from oil and gas production could only be taxed in the states where the oil and gas wells were located. "The geographic location of such raw materials does not alter the fact that such income is part of the unitary business of the interstate enterprise and is subject to fair apportionment among all states to which here is a sufficient nexus (i.e. relations) with the interstate activities of the business," he wrote.
Both Wisconsin and Vermont use a formula to apportion income that compares a company's sales, payroll and assets within each state to its companywide totals, and averages the three. They then tax that proportion of a company's total income.
In Exxon's case for those four years, it had sales of $60 million in Wisconsin, or 0.41 percent of its total sales. The state's formula resulted in taxation of only 0.22 percent of its total income, Marshall noted, an indication the state was not trying to tax an unfair share of the company's income.
Mobile, unlike Exxon, did not claim it was not engaged in a "unitary business," but that dividends from foreign subsidiaries, whether majority owned or not could not be considered part of its unified operations.