High court upholds states on taxing multinationals

June 21, 1994|By Lyle Denniston | Lyle Denniston,Washington Bureau of The Sun

WASHINGTON -- The Supreme Court gave states broad new power yesterday to reach overseas to gather tax revenue from multinational companies that do business in the United States.

By a vote of 7-2, the court ruled that the Constitution allows states to tax a share of the worldwide income of multinational firms that have some operations inside those states -- even if that means companies will pay taxes more than once on the same income.

Congress has control of this situation, the court declared, and it has refused, despite repeated urgings from foreign governments and sometimes by the State Department, to limit such state taxing authority.

A case from California that produced the new ruling had brought a wave of legal protests from foreign governments, including those of Britain, Canada, Australia, Austria, Japan, Finland, Norway and Sweden, as well as the European Union. Britain has already moved to retaliate with a tax on dividends paid to U.S. corporations by their British subsidiaries; other governments are likely to consider similar countermeasures.

The Clinton administration, switching from a position long held by the federal government, somewhat hesitantly endorsed state power to adopt such taxes. That stance carried out a political promise President Clinton had made to California during the 1992 campaign.

The new decision appears to have no impact on Maryland taxes levied on companies that do business internationally. The state taxes the income of corporations based only on each corporate unit's earnings with some connection to Maryland, thus avoiding an impact on income earned in overseas operations.

The companies whose global income can be partly tapped by the states under the ruling are those that lump all their activities, in the United States and elsewhere, into a combined "unitary" business operation. States then figure what percentage of a company's business is done in that state, and tax global income on that sum -- even if the company earned nothing in the taxing state.

Foreign companies have objected to such taxes, partly because those companies often earn considerably more at home or in other countries than from their U.S. operations. They also have protested because the international community generally prefers that taxes be assessed separately on each corporate unit's actual earnings, or an approach that bars any local government of a nation from taxing income earned outside that nation's borders.

Although many states -- including California -- have shifted away from the tax method the court upheld yesterday, primarily because of international pressure, the new ruling might lead some states to move back toward the global taxing ap

proach now that its constitutionality has been upheld.

The Organization for International Investment, a trade group of U.S. companies with foreign owners, expressed concern that the decision could be "the start of a new and ominous chapter" threatening multinationals that have any business ties to U.S. states.

The decision widens considerably state taxing power over multinationals that the court first upheld 11 years ago. In 1983, the court upheld a state's use of the so-called "worldwide unitary tax" on U.S.-based companies that had foreign subsidiaries.

Yesterday, the court voted 7-2 to allow the same approach for taxing the income of foreign-owned multinationals -- groupings of foreign and domestic firms with a foreign parent. That approach was challenged by the British-based Barclays Bank. In a separate, unanimous vote, the court allowed that approach for U.S.-owned multinationals -- groupings of foreign and domestic firms with a U.S. parent. That had been challenged by Colgate-Palmolive Co.

Even though California has since moved away from the taxing formula at issue, the case had continued because multinationals were seeking nearly $4 billion in refunds for the years that method was in use.

The court rejected all the constitutional challenges levied at the worldwide taxing approach, saying it did not discriminate against foreign commerce and did not compromise the U.S. government's power to carry on international trade.

In a second ruling yesterday, the court by a 6-3 vote struck down a Labor Department policy that gave injured longshoremen or coal miners infected with "black lung" disease the benefit of the doubt in benefits cases. Under the nullified policy, if the evidence for and against benefits was of equal weight, the benefits had to be awarded.

Now, the workers must prove that they are entitled to the benefits.

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