Supreme Court turns aside challenge to Md. business-profits tax

February 20, 1991|By Lyle Denniston | Lyle Denniston,Washington Bureau of The Sun

WASHINGTON -- A Maryland business-profits tax that reaches out-of-state affiliates of corporations that operate inside the state withstood a constitutional challenge in the Supreme Court yesterday.

Without comment, the court turned aside a complaint that Maryland was reaching far beyond its own borders to tax, in an unconstitutional way, some of the profits of export-sales companies.

Maryland tax officials, the unsuccessful appeal said, were engaging in "a revolutionary expansion of state taxing power." The court's rejection of that complaint was silent, since the justices never explain their refusal to hear an appeal.

The tax was upheld last May by the Maryland Court of Special Appeals.

The challenging companies, known as "domestic international sales corporations," were set up solely to shelter from federal tax some of the income that is generated when U.S.-made goods are sold for export. None of these "DISCs" has any offices, plant or employees in Maryland.

Each of them, however, is related to a company with extensive activity in Maryland: Armco Inc., which produces steel at various sites around the state; General Motors Corp., which assembles minivans in Baltimore; and Morton Thiokol Inc., which has a rocket-engine plant in Elkton.

Because of the export companies' ties to companies doing business in the state, and because those Maryland businesses are "unitary" companies, Maryland tax officials ruledthat a portion of the export companies' profits was subject to the state's business income tax.

That tax is assessed on the out-of-state affiliates according to a formula based on the proportion of the Maryland corporation's activity in the state to its total activity.

The export-sales affiliates of Armco, GM and Morton Thiokol are, in essence, only "phantom" businesses that take care of the bookkeeping necessary to allot income in a way that shelters it from federal taxes.

Separately, the court, voting 6-3, for the first time upheld state powerto impose a "value-added" tax on multistate businesses by using the same kind of allocation formula that has long been used to tax interstate businesses' income.

A value-added tax, imposed by Michigan in this case, is keyed to the value that is supposedly added to goods and services through the use of a company's labor and capital. The Michigan case involved only that state's tax, but the appeal had argued that if the Supreme Court ruled in favor of that state, others would be likely to follow suit and adopt similar taxes.

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