Supreme Court to review states' taxing authority Move may mean overturning 2 earlier rulings.

March 12, 1992|By Lyle Denniston | Lyle Denniston,Washington Bureau

WASHINGTON -- The Supreme Court sent revenue-short states a strong hint yesterday that they might gain more power to tax the income of businesses that operate across state lines and globally.

In a move that a Maryland official said could aid the state's coffers, the court volunteered to consider overruling two of its own decisions curbing states' taxing authority. It had not been asked directly to do that.

Tax lawyers said the court's move widened a controversy that could involve tens of millions of dollars of tax liability. It also raised the possibility of spreading corporate tax revenue among more states and increasing the overall tax take.

The court's one-page order indicated that the justices will use a pending New Jersey tax case to decide whether to keep 1982 rulings on the issue of state tax liability when companies make money by investing idle funds in other corporations.

Such an investment is considered passive because it is not done to add lines of businesses or to expand existing lines, but to make money by buying into companies and later selling the stock at a gain.

Marvin Bond, a spokesman for the Maryland comptroller's office, said Maryland "faces all the time" the question of its power to tax a share of the income companies that are not based in the state but do business there. "There are so many multi-state and multi-national corporations here," he said, that the issue arises "very frequently."

If Maryland and other states gain more power to reach the passive-investment income of major companies with plants or offices in those states, they will be allowed to tax only an allotted part of that income. An allotment of the income would have to be made to assure that the same income was not taxed by more than one state.

In the two decisions that will be reconsidered, the court ruled that a state may tax passive income if the company has headquarters in that state. In fact, many states reduce the tax on such companies to keep them.

The 1982 rulings declared that if a company does business in a state but is based elsewhere, the Constitution bars that state from taxing its passive-investment income.

Those rulings were decided by 6-3 votes. The three dissenters are still on the court. Only two of the justices in the majorities remain on the bench. Thus, yesterday's order was a suggestion that those dissenters have gained enough support among the newer justices to threaten the earlier decisions.

The court told lawyers who argued the New Jersey case last week to return April 22 for a new hearing. The court also told them to be prepared to debate whether the court should overrule the 1982 decisions in the cases of ASARCO Inc. vs. Idaho Tax Commission and F. W. Woolworth vs. Taxation Department of New Mexico.

If it overturns those rulings, the court said, it also will consider whether to do so retroactively, which would clear the way for states to demand taxes they have been unable to collect since the 1982 decisions.

A ruling is expected by early summer.

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