Subject:  TRINOVA CORP. v. MICHIGAN DEPT. OF TREASURY, Syllabus



    NOTE: Where it is feasible, a syllabus (headnote) will be released, as
    is being done in connection with this case, at the time the opinion is
    issued.  The syllabus constitutes no part of the opinion of the Court
    but has been prepared by the Reporter of Decisions for the convenience
    of the reader.  See United States v. Detroit Lumber Co., 200 U.9S. 321,
    337.
SUPREME COURT OF THE UNITED STATES


Syllabus


ATRINOVA CORP. v. MICHIGAN DEPARTMENT
OF TREASURY


Bcertiorari to the supreme court of michigan

CNo.989-1106.  Argued October 1, 1990--Decided February 19, 1991

DMichigan's single business tax (SBT) is a value added tax (VAT) levied
against entities having "business activity" within the State.  As part of
the SBT computation, a taxpayer doing business both within and without the
State must determine its apportioned tax base by multiplying its total
value added--which consists of its profit, as represented by its federal
taxable income, plus compensation paid to labor, depreciation on capital,
and other factors--by the portion of its business activity attributable to
Michigan--which consists of the average of three ratios: (1) Michigan
payroll to total payroll, (2) Michigan property to total property, and (3)
Michigan sales to total sales.  During 1980, the tax year in question,
petitioner Trinova, an Ohio corporation, maintained a 14person sales office
in Michigan.  Under the SBT formula, its 1980 payroll and property
apportionment factors were only .2328% and .0930% respectively, while its
sales factor was 26.5892%, representing Michigan sales of over $100
million.  Although its 1980 federal taxable income showed a loss of almost
$42.5 million, Trinova's SBT computation resulted in a tax of over
$293,000.  Trinova paid the tax, but subsequently filed an amended return
and refund claim, alleging that it was entitled to relief under Michigan
law because the SBT's apportionment provisions did not fairly represent the
extent of its business activity within the State.  The amended return
proposed that Trinova's company-wide compensation and depreciation be
excluded from its pre-apportionment value added, and that its actual
Michigan compensation and depreciation be added back into its apportioned
tax base, which would result in a negative value added apportioned to
Michigan and entitle the company to a refund for its entire 1980 SBT
payment.  When respondent Department of Treasury denied relief, Trinova
sued for a refund in the State Court of Claims, which ruled in its favor.
However, the State Court of Appeals held that Trinova was not entitled to
statutory relief, and the State Supreme Court affirmed, holding, among
other things, that the SBT's three-factor apportionment formula did not
violate either the Due Process Clause or the Commerce Clause of the Federal
Constitution.

EHeld: As applied to Trinova during the tax year at issue, the SBT's
threefactor apportionment formula does not violate either the Due Process
Clause or the Commerce Clause.  Pp.911-26.

    F(a) Under the test stated in Complete Auto Transit, Inc. v. Brady, 430
    U.9S. 274, 279, a state tax levied upon multistate businesses is valid
    under the Commerce Clause if, as relevant here, it is fairly
    apportioned and does not discriminate against interstate commerce.
    Moreover, the Complete Auto test encompasses the Due Process Clause
    requirement that, inter alia, a rational relationship exist between the
    income attributed to the State and the intrastate values of the
    enterprise.  See, e.9g., Mobil Oil Corp. v. Commissioner of Taxes of
    Vt., 445 U.9S. 425, 436-437.  Pp.911-13.

    (b) Because the SBT attempts to tax a base that cannot be assigned to
    one geographic location with any precision, the decision to apportion
    the tax is not unconstitutional.  Although Trinova's compensation and
    depreciation may appear in isolation to be susceptible of geographic
    designation, those elements cannot be separated from income, which
    cannot be located in a single State.  The SBT is not a combination or
    series of several smaller taxes on compensation, depreciation, and
    income, but is an indivisible tax upon a different, bona fide measure
    of business activity, the value added.  This conclusion is no different
    than the one this Court has reached in upholding the validity of state
    apportionment of income taxes.  The same factors that prevent
    determination of the geographic location where income is
    generated--such as functional integration of the intrastate and
    extrastate activities of a unitary business enterprise, centralization
    of management, and economies of scale--make it impossible to determine
    the location of value added with exact precision.  See, e.9g., Mobil
    Oil Corp., supra, at 438; Amerada Hess Corp. v. Director, Div. of
    Taxation, New Jersey Dept. of Treasury, 490 U.9S. 66, 74.  Thus,
    although Trinova had no federal income during 1980, it cannot be
    relieved of tax upon its Michigan business.  Such relief would be
    incompatible with the rationale of a VAT, under which tax becomes due
    even if the taxpayer was unprofitable, and is unsupported by the
    record.  Trinova's approach would require the conclusion that it added
    value only at the factory through the consumption of capital and labor,
    while the record would as easily support a finding that its production
    operations added little value and its sales offices added significant
    value.  Although Trinova's 14 Michigan sales personnel need not be
    relied on as the sole, or even a substantial, source of all the value
    added that can be apportioned fairly to Michigan, it cannot be doubted
    that, without the company's $100 million in Michigan sales, its total
    value added would have been lower to a remarkable degree.  It distorts
    the SBT both in application and theory to confine value added
    consequences of the Michigan market solely to the labor and capital
    expended by the resident sales force.  Pp.913-19.

    (c) The SBT's three-factor apportionment formula cannot be ruled
    unfair, since Trinova has failed to meet its burden of proving, by
    clear and cogent evidence, that there is no rational relationship
    between its tax base measure attributed to Michigan and the
    contribution of its Michigan business activity to the entire value
    added process.  Cf., e.9g., Container Corp. of America v. Franchise Tax
    Bd., 463 U.9S. 159, 169, 180-181; Moorman Mfg. Co. v. Bair, 437 U.9S.
    267, 274.  This Court has approved the same formula for apportionment
    of income, see, e.9g., Butler Bros. v. McColgan, 315 U.9S. 501, and the
    formula has gained wide acceptance in that context "because payroll,
    property, and sales appear in combination to reflect a very large share
    of the activities by which value is generated," Container Corp., supra,
    at 183 (emphasis added).  Trinova's argument--that the formula leads to
    a distorted result, out of all proportion to the company's Michigan
    business, because sales have no relationship to, and add nothing to,
    the value that compensation and depreciable plant contribute to the
    Michigan tax base--is rejected, since sales (as a measure of market
    demand) do have a profound impact upon the amount of an enterprise's
    value added, and since there is no basis for distinguishing similar
    arguments that were pressed, and rejected by this Court, with regard to
    the apportionment of income.  Because the three-factor formula causes
    no distortion, the SBT does not tax value earned outside Michigan.  The
    argument that the value was added in Ohio, by labor and capital, and
    that no value has been added in Michigan, wrongly assumes that value
    added is subject to geographic ascertainment and that a sales factor is
    inappropriate in apportionment.  Trinova gives no estimate of the value
    added that would take account of both its Michigan sales activity and
    Michigan market demand for its products, whereas the State has
    consistently applied the three-factor formula and has enacted further
    provisions giving relief to labor intensive taxpayers like Trinova.
    Pp.919-24.

    (d) The SBT does not discriminate against interstate commerce.  Trinova
    cannot point to any treatment of in-state and out-of-state firms that
    is discriminatory on its face.  Although American Trucking Assns. v.
    Scheiner, 483 U.9S. 266, 281, states that the Commerce Clause has a
    "deeper meaning" that may be implicated even absent facial
    discrimination, that meaning is embodied in the requirement of fair
    apportionment and does not encompass Trinova's vague accusation of
    discrimination.  Nor is that accusation supported by a statement of
    Michigan's Governor that the SBT was enacted to promote business
    development and investment within the State.  Such promotion is a
    laudatory goal in the absence of evidence of an impermissible motive to
    export tax burdens or import tax revenues.  Pp.924-26.

G433 Mich. 141, 445 N. W. 2d 428, affirmed.

HKennedy, J., delivered the opinion of the Court, in which Rehnquist,
C.9J., and White, Marshall, and O'Connor, JJ., joined.  Scalia, J., filed
an opinion concurring in the judgment.  Stevens, J., filed a dissenting
opinion, in which Blackmun, J., joined.  Souter, J., took no part in the
consideration or decision of the case.
------------------------------------------------------------------------------




Subject: X, 89-1106--OPINION



TRINOVA CORP. v. MICHIGAN DEPT. OF TREASURY


NOTICE: This opinion is subject to formal revision before publication in
the preliminary print of the United States Reports.  Readers are requested
to notify the Reporter of Decisions, Supreme Court of the United States,
Washington, D. C. 20543, of any typographical or other formal errors, in
order that corrections may be made before the preliminary print goes to
press.
SUPREME COURT OF THE UNITED STATES


No. 89-1106




ATRINOVA CORPORATION, PETITIONER v. MICHIGAN DEPARTMENT OF TREASURY

Bon writ of certiorari to the supreme court of michigan

C[February 19, 1991]



A Justice Kennedy delivered the opinion of the Court.
B The principal question before us is whether the threefactor apportionment
formula of the Michigan single business tax (SBT), Mich. Comp. Laws 9208.1
et seq. (1979), violates either the Due Process Clause or the Commerce
Clause of the Federal Constitution.  The applicability of a three-factor
formula to a state income tax is well settled, but we have not considered
whether a similar apportionment formula may be applied to a value added tax
(VAT).  We granted certiorari to consider this question and to determine
whether the Michigan SBT discriminates against out-of-state businesses.

CI
D Although in Europe and Latin America VAT's are common, see Lindholm, The
Origin of the Value-Added Tax, 6 J. Corp. L. 11 (1980); Due, Economics of
the Value Added Tax, 6 J. Corp. L. 61 (1980), in the United States they are
much studied but little used.  Michigan is the first and, the parties tell
us, the only State to have enacted a VAT as a tax on business activity.  We
begin with a description of value added and VAT's in general, and then
discuss the Michigan SBT.

CA
D Value added is an economic concept.  "Value added is defined as the
increase in the value of goods and services brought about by whatever a
business does to them between the time of purchase and the time of sale."
Haughey, The Economic Logic of the Single Business Tax, 22 Wayne L. Rev.
1017, 1018 (1976) (hereinafter Haughey).  The value a business adds to a
single product is "the difference between the value of the product at sale
and the cost of goods purchased from other businesses that went into the
product."  Taxation and Economic Policy Office, Michigan Department of
Treasury, Analysis of the Michigan Single Business Tax 20-21 (1985)
(hereinafter SBT Analysis).  It follows that the sale price of a product is
the total of all value added by each step of the production process to that
point.  "The value added of a loaf of bread is the sum of the value
contributed at each stage of the production and distribution process.
Among others, it includes the contribution of the farmer, miller, baker,
wholesaler and retailer."  Haughey 1019.
    A business "adds value by handling or processing these [goods] with its
labor force, machinery, buildings and capital."  R. Kleine, Advisory
Commission on Intergovernmental Relations, The Michigan Single Business
Tax: A Different Approach to State Business Taxation 1 (1978) (hereinafter
Kleine).  In this litigation, value added usually refers to the activities
of a single business enterprise.  The term can, however, be used with
regard to a single product, or even an entire economy.  "[Value added] is a
means of consistently measuring the size of business firms and other
economic enterprises comprising the total economy9.9.9.9.  Gross National
Product is virtually equivalent to national value added."  Haughey 1017.
    One of the acknowledged advantages of value added as a measure of
taxation is its neutrality.  A VAT is neutral in the sense that it taxes
all business activity alike: under a pure VAT, all forms of business
organization (corporation, partnership, proprietorship), all types of
financing (debt, equity) and all methods of production (capital intensive,
labor intensive) bear the same tax burden.

E"[T]ax factors are minimized in business decisions; inherent advantages
and relative efficiencies are allowed to operate in the market economy with
minimum tax distortions.
    "This neutrality of a value-added tax is in notable contrast to the
effects of both the corporation income tax and the payroll taxes.  The
former, by definition, is applied only to corporations and varies with
their reliance on equity rather than debt capital and the efficiency with
which they use equity capital--that is, their net profits."  Smith,
Value-added tax: the case for, 48 Harv. Bus. Rev. 77, 79 (1970).
F

Though neutral in theory, VAT's often depart in practice from the pure
value added model because of special exemptions, deductions, and other
adjustments.  These features can eliminate much of the claim to neutrality.
See generally, The Value-Added Tax: Lessons from Europe (H. Aaron ed.
1981).
    A VAT differs in important respects from a corporate income tax.  A
corporate income tax is based on the philosophy of ability to pay, as it
consists of some portion of the profit remaining after a company has
provided for its workers, suppliers, and other creditors.  A VAT, on the
other hand, is a much broader measure of a firm's total business activity.
Even if a business entity is unprofitable, under normal circumstances it
adds value to its products and, as a consequence, will owe some VAT.
Because value added is a measure of actual business activity, a VAT
correlates more closely to the volume of governmental services received by
the taxpayer than does an income tax.  Further, because value added does
not fluctuate as widely as net income, a VAT provides a more stable source
of revenue than the corporate income tax.  See generally Kleine 3, figure
1.  "9`The logic or rationale of the [VAT] rests squarely on the benefits
received principle of taxation--government services are essential to the
operation of any business enterprise .9.9. and a part of these public
service costs should properly be included in the cost of doing business.'9"
Id., at 4 (citation omitted).
    The SBT Analysis 20-21, provides us the following simplified example of
how value added is determined.  Assume a bakery's sole revenue comes from
the sale of bread.  The bakery's costs consist of materials (flour, sugar,
spices, utilities), labor (baker, sales clerk), capital (building, mixer,
utensils, oven), and credit (interest paid on loans).  Any excess of
revenues over costs represents profit.  Thus,

E
Revenue = Cost of Labor + Cost of Materials + Depreciation9 {1} + Interest
+ Profit.
F

Because value added is defined as the difference between the value of
products sold (revenues), and the cost of materials going into the
products, we can represent value added (for the entire firm) by a second
simple equation:

E
Value added = Revenues--Cost of Materials.
F

The same result is reached by another common method.  If we subtract Cost
of Materials from each side of the first equation above, we have:

ERevenues--Cost of Materials = Cost of Labor + Depreciation + Interest +
Profit.
F

So in practice value added can be calculated as either Revenues--Cost of
Materials; or Cost of Labor + Depreciation + Interest + Profit.  Not
surprisingly, these are referred to as the "subtraction" and the "addition"
methods.  Each provides an identical measurement of a taxpayer's value
added. {2}  Once value added is determined, the VAT is assessed as a
percentage of the value added for the relevant fiscal period. {3}

CB
D The Michigan SBT went into effect on January 1, 1976.  1975 Mich. Pub.
Acts 228. {4}  The SBT replaced seven different business taxes.  Kleine 22;
Brief for Respondent 8.  Before 1976, a typical manufacturer with business
activity in Michigan would have been subject to a franchise tax, an income
tax, an intangible property tax, and an ad valorem property tax upon
inventories.  Mitchell, Taxes Repealed and Amended, 22 Wayne L. Rev. 1029
(1976); Brief for Respondent 8-9.  After enactment of the SBT, the same
manufacturer would pay only one tax.
    The Michigan SBT is an addition method VAT, although it inevitably
permits various exclusions, exemptions, and adjustments that depart from
the simple value added examples described above.  Subject to exemptions
contained at Mich. Comp. Laws 9208.35, Michigan SBT is levied against any
person with "business activity" within the State of Michigan.  Mich. Comp.
Laws 9208.31(1) (1979). {5}  In order to calculate the amount of a
taxpayer's SBT the taxpayer must, first, determine its total tax base.  The
total tax base consists of the taxpayer's value added, calculated by the
addition method: Cost of Labor + Depreciation + Interest + Profit.  Under
Mich. Comp. Laws 9208.9 (1979), the taxpayer begins with federal taxable
income (representing profit), adds other elements that reflect consumption
of labor and capital including compensation, depreciation, dividends, and
interest paid by the taxpayer, and makes other detailed adjustments.
    Second, if a taxpayer does business both within and without Michigan,
it must determine the portion of its total value added attributable to
Michigan.  That portion, the crux of this case, is the average of three
ratios: (1) Michigan payroll to total payroll, (2) Michigan property to
total property, and (3) Michigan sales to total sales.  Mich. Comp. Laws
9208.45, 208.46, 208.49, 208.51 (1979).  The total tax base is multiplied
by the portion of business activity attributable to Michigan (under the
three-factor formula), and the result, subject to several further
adjustments, is the taxpayer's "adjusted tax base."  9208.31(2).
    Two further adjustments are relevant here: 9208.23(a), which permits a
taxpayer to deduct a portion of its capital acquisitions, and 9208.31(5),
which permits a labor-intensive taxpayer to reduce its adjusted tax base by
a percentage equal to the percentage by which compensation exceeds 63% of
the total tax base, but with such reduction not to exceed a maximum of 37%.
Actual tax liability equals the adjusted tax base multiplied by a tax rate
of 2.35%. {6}

CII
D Trinova, an Ohio corporation, manufactures automobile components.  Its
principal office is located in Maumee, Ohio, a suburb of Toledo located
near the Michigan border.  During 1980, the tax year in question, Trinova
maintained a fixed presence in Michigan: a sales office of 14 employees who
solicited orders, maintained contact with Trinova's Michigan customers, and
performed clerical work.  Michigan, with its automobile industry, was a
major market for Trinova's products.  Indeed, Trinova made $103,981,354
worth of sales to Michigan during 1980, 26.5892% of its total sales of
$391,065,866.  Trinova calculated its 1980 SBT adjusted tax base as
follows:
    U.9S. taxable income (loss) ($42,466,114)

    Add:
            Compensation $226,356,271
            Depreciation $23,262,909
            Dividends, interest and royalties
                paid $22,908,950
            Other $549,526


            Subtotal $230,611,542


    Subtract:
            Dividends, interest and royalties
                received ($9,486,223)


            Total Tax Base $221,125,319


    Apportionment
            Payroll Factor .2328%
            Property Factor .0930%
            Sales Factor 26.5892%


            Average Factor 8.9717%
    Apportioned Tax Base:
                $221,125,319
                x 8.9717%


                = $19,838,700



See 433 Mich. 141, 150-152, 445 N.9W. 2d 428, 431-433 (1989).  Trinova
further adjusted its tax base by subtracting a capital acquisition
deduction ($9,063) and by taking the maximum (37%) reduction for
labor-intensive taxpayers.  These adjustments resulted in a 1980 adjusted
tax base of $12,492,671.  When multiplied by the tax rate of 2.35%, Tri
nova's tax liability amounted to $293,578 ($12,492,671 x 2.35%). {7}
Trinova timely filed its return and paid its tax liability.
    In 1985, a Michigan intermediate court of appeals ruled that taxpayers
similarly situated to Trinova were entitled to "relief" under Mich. Comp.
Laws 9208.69 (1979), a provision of the SBT.  Jones & Laughlin Steel Corp.
v. Department of Treasury, 145 Mich. App. 405, 377 N.9W. 2d 397 (1985),
leave to appeal and reconsideration denied, 424 Mich. 895 (1986).  At the
time, 9208.69 provided that if the apportionment provisions of the SBT did
not "fairly represent the extent of the taxpayer's business activity" in
Michigan, the taxpayer could, among other alternatives, petition for the
employment of "any other method to effectuate an equitable allocation and
apportionment of the taxpayer's tax base."
    Soon after the decision in Jones & Laughlin, Trinova filed an amended
return and refund claim for the 1980 tax year.  Based on the relief granted
in Jones & Laughlin, Trinova proposed that despite admitted company-wide
value added of $221 million and Michigan sales of over $100 million, for
purposes of the Michigan SBT it should be treated as if it had negative
total value added.  Value added apportioned to Michigan would also have
been negative, and Trinova would have been entitled to a refund for its
entire 1980 SBT payment. {8}  Upon denial of relief by the Michigan
Department of Treasury, Trinova sued for a refund in the Michigan Court of
Claims, which ruled in Trinova's favor on the authority of Jones &
Laughlin.  No.986-10430-CM (Mich. Ct. Cl., May 5, 1987); App. to Pet. for
Cert. 42a-51a.
    While the Department of Treasury's appeal was pending in the Michigan
Court of Appeals, the legislature amended 9208.69.  1987 Mich. Pub. Acts
39.  The amended 9208.69 creates a presumption that the statutory
apportionment formula fairly represents the taxpayer's business activity in
Michigan unless the adjusted tax base meets one of two tests, neither of
which Trinova could satisfy, and which do not merit discussion here.  See
Mich. Comp. Laws Ann. 9208.69(3) (West Supp. 1990).  The Court of Appeals
referred to the legislature's statement that its act was intended to be

E"curative, expressing the original intent of the legislature that the
single business tax .9.9. is an indivisible value added type of tax and not
a combination or series of several smaller taxes and that relief from
formulary apportionment should be granted only under extraordinary
circumstances."  1987 Mich. Pub. Acts 39, 92.
F

Relying upon this language, the Court of Appeals determined that the
amendment was to be given retroactive effect as a "remedial and procedural"
statute and that Trinova was not entitled to statutory relief.  166 Mich.
App. 656, 666, 421 N.9W. 2d 258, 262 (1988).
    The Michigan Supreme Court affirmed the Court of Appeals.  433 Mich.
141, 445 N.9W. 2d 428 (1989).  Without addressing retroactive application
of the amendments to 9208.69, it construed 9208.69 as a "constitutional
`circuit breaker'9" to be applied only if required in order to save the SBT
against unconstitutional application.  Id., at 156, 445 N.9W. 2d, at 434.
The court then upheld the SBT against Trinova's federal constitutional
challenges.  The Michigan Supreme Court noted that formulary apportionment
of income taxes is uncontroversial, and that it did "not believe that
`business activity' as defined under the [SBT] is susceptible to accurate
analysis when only one component of the total business effort is examined."
Id., at 163, 445 N.9W. 2d, at 438.  The court concluded that Trinova's
averaged ratios of payroll, property and sales are a fair representation of
the extent of its business activity in Michigan, making it ineligible for
relief on statutory or constitutional grounds.  Id., at 163-166, 445 N.9W.
2d, at 438-439.  We granted Trinova's petition for a writ of certiorari.
494 U.9S. Z (1990).

CIII
D The principles which govern the validity of state taxes levied upon
multistate businesses seek to accommodate the necessary abstractions of tax
theory to the realities of the marketplace.  Under the test stated in
Complete Auto Transit, Inc. v. Brady, 430 U.9S. 274, 279 (1977), we will
sustain a tax against Commerce Clause challenge so long as "the tax is
applied to an activity with a substantial nexus with the taxing State, is
fairly apportioned, does not discriminate against interstate commerce, and
is fairly related to the services provided by the State."  We applied this
four-part test in later cases addressing a wide variety of taxes.  See
Goldberg v. Sweet, 488 U.9S. 252, 260, n.912 (1989) (citing applications in
cases involving sales, severance, use, corporate income, and business and
occupation taxes).
    In Complete Auto, we renounced the formalistic approach of Spector
Motor Service, Inc. v. O'Connor, 340 U.9S. 602 (1951), which had prohibited
a state from taxing the privilege of doing business in the State, treating
it as a tax upon interstate commerce and so beyond the authority of the
State.  We seek to avoid formalism and to rely upon a "consistent and
rational method of inquiry [focusing on] the practical effect of a
challenged tax."  Mobil Oil Corp. v. Commissioner of Taxes of Vt., 445
U.9S. 425, 443 (1980).  The Complete Auto test, while responsive to
Commerce Clause dictates, encompasses as well the Due Process requirement
that there be "a `minimal connection' between the interstate activities and
the taxing State, and a rational relationship between the income attributed
to the State and the intrastate values of the enterprise."  Mobil Oil
Corp., supra, at 436-437; see also Amerada Hess Corp. v. Director, Div. of
Taxation, New Jersey Dept. of Treasury, 490 U.9S. 66, 80 (Scalia, J.,
concurring) (1989).
    In this Court, Trinova does not dispute that its business activities
have a substantial nexus with Michigan and subject it to the State's taxing
authority.  Nor does Trinova argue that the amount of tax it is required to
pay bears no fair relation to the services provided by the State.  Complete
Auto, supra, at 279.  Trinova instead contends that Michigan's SBT fails
the other two prongs of the Complete Auto test: that the SBT is not fairly
apportioned as applied to Trinova, and that the tax discriminates against
interstate commerce.  We consider these claims, and begin with the matter
of apportionment.

NA
D Trinova's claim that apportionment of the tax is unconstitutional
concentrates on the elements of the apportionment formula.  The original
rationale for apportionment of income was the difficulty of identifying the
geographic source of the income earned by a multistate enterprise.  See
Underwood Typewriter Co. v. Chamberlain, 254 U.9S. 113, 120-121 (1920)
(legislature "faced with the impossibility of allocating specifically the
profits earned by the [taxpayer's] processes conducted within its
borders").  As we stated the problem in Container Corp. of America v.
Franchise Tax Bd., 463 U.9S. 159, 192 (1983), "[a]llocating income among
various taxing jurisdictions bears some resemblance .9.9. to slicing a
shadow."  Trinova argues that because its SBT tax base is composed in large
part of compensation and depreciation, elements which can be assigned to a
geographic source, we must reject apportionment altogether.
    We can accept the premise that apportionment is permitted only when
precise geographic measurement is not feasible, for to allow apportionment
where there is no practical or theoretical justification could provide the
opportunity for a state to export tax burdens and import tax revenues.  The
Commerce Clause prohibits this competitive mischief.  The issue becomes
whether, without an apportionment formula, Michigan can assign the SBT tax
base and its principal components to separate geographic locations and to
separate accounts in each state.  Michigan has decided it cannot do so
without serious theoretical and practical difficulty, and upon review of
the case we accept that determination.
    We reject at the outset, however, arguments by Michigan and some amici
curiae that the Michigan SBT can be analyzed as a tax upon "business
activity."  Brief for Council of State Governments et al. as Amici Curiae
11.  The statute does not say that the SBT is a tax upon business activity,
but rather that it is a "tax of 2.35% upon the adjusted tax base of every
person with business activity in this state which is allocated or
apportioned to this state."  Mich. Comp. Laws 9208.31(1) (1979) (emphasis
added).  While Michigan business activity is a threshold requirement for
the tax, and value added is its measure, labeling the SBT a tax on
"business activity" does not permit us to forgo examination of the actual
tax base and apportionment provisions.  "A tax on sleeping measured by the
number of pairs of shoes you have in your closet is a tax on shoes."
Jenkins, State Taxation of Interstate Commerce, 27 Tenn. L. Rev. 239, 242
(1960).
    Trinova errs in the opposite direction.  It would dissect the tax base
as if the SBT were three separate and independent taxes: a tax on
compensation, a tax on depreciation, and a tax on income, each apportioned.
Trinova insists that compensation and depreciation can be located, and can
be separated from the total value added calculation.  As a result, Trinova
would be taxed upon its Michigan compensation and Michigan depreciation.
It would owe no additional tax upon income apportionable to Michigan,
because it had no income during the relevant tax year.
    This characterization, and with it Trinova's constitutional argument,
fails.  Doubtless Trinova can identify the location of its plant and
equipment, and much of its compensation.  The Michigan SBT, however, is not
three separate and independent taxes, and Trinova cannot purport to
identify the geographic source of value added by assuming that two elements
can be located in a single state while the third cannot.  Trinova's
proposed apportionment for the 1980 tax year, n.98, supra, provides a good
example of the problems that accompany its argument.
    In 1980, Trinova's company-wide value added amounted to much less than
its compensation plus depreciation.  In short, Trinova was unprofitable.
Under a VAT, however, tax becomes due in any event.  Trinova's approach
would require us to conclude that Trinova added value at the factory
through the consumption of capital and labor, but that its products somehow
lost value outside of this process, perhaps between the time they left the
factory and the time they were delivered to customers in Michigan.  This
approach is incompatible with the rationale of a VAT, and is unsupported in
the record.
    For all this record shows, Trinova's production operations might have
added little value and its sales offices might have added significant
value, through superior marketing skill, liaison between the company and
its customers, or mere fortuity.  See Moorman Mfg. Co. v. Bair, 437 U.9S.
267, 272 (1978) (record lacked analysis of what portion of profits was
apportionable to sales, to manufacturing or to other phase of company's
operations).
    But we need not rely upon Trinova's 14 Michigan sales personnel as the
source of all the value added that can be apportioned fairly to Michigan.
In a unitary enterprise, compensation, depreciation and profit are not
independent variables to be adjusted without reference to each other.  If
Trinova had paid an additional $100 million in compensation during 1980,
there is no way of knowing whether, or to what extent, value added would
have increased.  In fact, value added would not have increased so long as
revenues did not increase.  These elements of value added are inextricable,
codependent variables.
    Without Trinova's $100 million in 1980 Michigan sales, the company's
value added would have been lower to a remarkable degree.  The market
demand that sustained those sales did not arise solely, perhaps not even
substantially, from the activities of Trinova's 14 Michigan sales
personnel.  But there can be little doubt that requirements of the Michigan
market determined the direction of Trinova's design, production and
distribution process.  By serving that market and meeting its demands,
Trinova generated value added in the sums that it did.  We can and must
assume that Michigan sales were a part of the company's essential economic
strategies and were an intregral part of company-wide value added.  It
distorts the tax both in application and theory to confine value added
consequences of the Michigan market solely to the labor and capital
expended by the resident sales force.
    Trinova's attempted characterization is arguable only because Michigan
calculates value added by the addition method.  The addition and
subtraction methods of calculating value, however, are but two different
paths to the same result.  See n.92, supra.  Had Michigan calculated the
SBT tax base by the subtraction method, reporting total revenues minus
total cost of materials, Trinova's characterization would collapse of its
own weight.  Trinova could geographically locate its revenues, and even
determine where it purchased its materials.  The Michigan apportionment
formula assumes as much.  But were Trinova to calculate value added based
upon the location of its revenues, it would apportion a much greater share
of its value added to Michigan (26.5892%) than was apportioned under
Michigan's threefactor formula (8.9717%).  An apportionment of value added
based solely on the source of revenues is no less justifiable than an
apportionment based solely upon the location of compensation or
depreciation.
    The difference between the addition and subtraction methods is one of
form, and lacks constitutional significance.  Michigan chose the addition
method of calculating value added as a convenience to taxpayers, for whom
federal taxable income provided an easy starting point.  Kleine 6-7
(discussing advantages of addition method); SBT Analysis 21 (same).  The
Constitution does not require a formalistic analysis resulting in a penalty
for Michigan's selection of an easier calculation method for its
taxpayers.
    Both methods of calculation, moreover, illustrate the justification for
the State's adoption of an apportionment formula.  Under either method,
value added includes a remainder or residual that cannot be located with
economic precision.  Under the addition method, value added contains the
element of income, one calculated by and dependent upon factors (revenues
minus total costs) not included in the addition method equation; under the
subtraction method, value added is itself a remainder, no more assignable
than income.  It would be impractical to locate value added by a geographic
test.  We thus agree with the Michigan Legislature's statement that the SBT
is not, for apportionment purposes, "a combination or series of several
smaller taxes," 1987 Mich. Pub. Acts 39, 92, but an "indivisible," ibid.,
tax upon a different, bona fide measure of business activity, the value
added.
    This conclusion is no different than the one we have reached in
upholding the validity of state apportionment of income taxes.  As with a
VAT, the discrete components of a state income tax may appear in isolation
susceptible of geographic designation.  Nevertheless, since Underwood
Typewriter Co. v. Chamberlain, 254 U.9S. 113 (1920), we have recognized the
impracticability of assuming that all income can be assigned to a single
source.  In this respect, Trinova's argument becomes a familiar and often
rejected genre of taxpayer challenge:

E"[A]pportionability often has been challenged by the contention that .9.9.
the source of [particular] income may be ascertained by separate
geographical accounting.  The Court has rejected that contention so long as
the intrastate and extrastate activities formed part of a single unitary
business.  Butler Bros. v. McColgan, 315 U.9S. 501, 506-508 (1942); Ford
Motor Co. v. Beauchamp, 308 U.9S. 331, 336 (1939); cf. Moorman Mfg. Co. v.
Bair, 437 U.9S., at 272.  In these circumstances, the Court has noted that
separate accounting, while it purports to isolate portions of income
received in various States, may fail to account for contributions to income
resulting from functional integration, centralization of management, and
economies of scale.  Butler Bros. v. McColgan, 315 U.9S., at 508-509.
Because these factors of profitability arise from the operation of the
business as a whole, it becomes misleading to characterize the income of
the business as having a single identifiable `source'.  Although separate
geographical accounting may be useful for internal auditing, for purposes
of state taxation it is not constitutionally required."  Mobil Oil Corp.,
445 U.9S., at 438.
F

    In a recent challenge to this unitary business principle, we rejected
the argument that particular assignable costs of a business should be
excluded from a broader tax base.  Ame rada Hess Corp. v. Director, Div. of
Taxation, New Jersey Dept. of Treasury, 490 U.9S. 66 (1989).  We considered
the New Jersey corporate income tax, which used federal taxable income as a
benchmark and required certain adjustments (as does the Michigan SBT).  New
Jersey required oil companies to add back into income any deduction taken
for taxes paid under the federal windfall profits tax.  The taxpayers
objected that the windfall profit tax is "an exclusively out-ofstate
expense because it is associated with the production of oil outside New
Jersey."  Id., at 74.
    In like manner, Trinova objects to the SBT's requirement that it add
compensation and depreciation to federal taxable income on the grounds that
these are, with limited exception, out-of-state expenses.  In Amerada Hess
Corp. we rejected outright the idea that geographically assignable costs of
production must be excluded from an apportionment of income:

E"[J]ust as each [taxpayer's] oil-producing revenue--as part of a unitary
business--is not confined to a single State, Exxon Corp., 447 U.9S., at
226, .9.9. so too the costs of producing this revenue are unitary in
nature.  See Container Corp., 463 U.9S., at 182 (the costs of a unitary
business cannot be deemed confined to the locality in which they are
incurred)."  Ibid.
F

    The reasoning of Amerada Hess Corp. applies with equal force to the
case here.  The same factors that prevent determination of the geographic
location where income is generated, factors such as functional integration,
centralization of management, and economies of scale, make it impossible to
determine the location of value added with exact precision.  In concluding
that Michigan can apportion the SBT, we merely reaffirm what we have
written before: "In the case of a more-or-less integrated business
enterprise operating in more than one State, .9.9.9 arriving at precise
territorial allocations of `value' is often an elusive goal, both in theory
and in practice."  Container Corp., 463 U.9S., at 164.

CB
D Having determined that Michigan's SBT attempts to tax a base that cannot
be assigned to one location with any precision, and that apportionment is
proper, we must next consider whether Michigan's apportionment formula for
Trinova's value added is fair.
    Container Corp. states our test for fair income

apportionment:

E"The first, and again obvious, component of fairness in an apportionment
formula is what might be called internal consistency--that is, the formula
must be such that, if applied by every jurisdiction, it would result in no
more than all of the unitary business' income being taxed.  The second and
more difficult requirement is what might be called external
consistency--the factor or factors used in the apportionment formula must
actually reflect a reasonable sense of how income is generated."  463
U.9S., at 169.
F

Trinova does not contest the internal consistency of the SBT's
apportionment formula, and we need not consider that question.
    Instead, Trinova argues that the SBT apportionment formula fails the
external consistency test.  In order to prevail on such a challenge, an
income taxpayer must prove "by `clear and cogent evidence' that the income
attributed to the State is in fact `out of all appropriate proportions to
the business transacted .9.9. in that State', [Hans Rees' Sons, Inc.,] 283
U.9S., at 135, or has `led to a grossly distorted result,' [Norfolk &
Western R. Co.,] 390 U.9S., at 326."  Moorman Mfg. Co., 437 U.9S., at 274.
We conclude that the same test applies to apportionment of a VAT.  Trinova
must demonstrate that, in the context of a VAT, there is no rational
relationship between the tax base measure attributed to the state and the
contribution of Michigan business activity to the entire value added
process.  See Container Corp., supra, at 180-181.
    The Michigan SBT uses the same three-factor apportionment formula we
first approved for apportionment of income in Butler Bros. v. McColgan, 315
U.9S. 501 (1942).  This standard has become "something of a benchmark
against which other apportionment formulas are judged."  Container Corp.,
supra, at 170; see also Moorman Mfg. Co., supra, at 282 (Blackmun, J.,
dissenting); id., at 283-284 (Powell, J., dissenting).  Although the
one-third weight given to each of the three factors--payroll, property, and
sales--is not a precise apportionment for every case, the formula "has
gained wide approval precisely because payroll, property, and sales appear
in combination to reflect a very large share of the activities by which
value is generated."  Container Corp., supra, at 183 (emphasis added).  The
three-factor formula is widely used, and is included in the Uniform
Division of Income for Tax Purposes Act, 7A U.9L.9A. 331 (1990 Cum. Supp.)
(approved in 1957 by the National Conference of Commissioners on Uniform
State Laws and the American Bar Association).
    Trinova argues that on the facts of this case, the threefactor formula
leads to a distorted result, out of all proportion to the business done by
Trinova in Michigan.  Trinova's Michigan payroll constituted .2328% of
total payroll, its Michigan property constituted .0930% of total property,
and its Michigan sales constituted 26.5892% of total sales.  The
three-factor formula averages these ratios, with the result that 8.9717% of
Trinova's value added, or $19,838,700, is assigned to Michigan.  Because
Trinova is a labor-intensive taxpayer, and can deduct capital acquisitions,
the tax base is further reduced to $12,492,671.
    In this Court, Trinova proposes an alternative two-factor
apportionment, excluding the sales factor.  Under the twofactor formula,
only .1629% of Trinova's value added, or $360,213, would be assigned to
Michigan.  Brief for Petitioner 33-34. {9}
    Although the three-factor formula "can be justified as a rough,
practical approximation of the distribution of either a corporation's
sources of income or the social costs which it generates," General Motors
Corp. v. District of Columbia, 380 U.9S. 553, 561 (1965), Trinova argues
that the formula does not reflect how the value added tax base is
generated.  The principal flaw, it contends, is that the formula includes a
sales factor.  "Sales have no relationship to, and add nothing to, the
value that [compensation and depreciable plant] contribute to the tax base
in Michigan."  Brief for Petitioner 31.  Trinova's position finds some
support among economists.  See Barlow & Connell, The Single Business Tax,
in Michigan's Fiscal and Economic Structure 673, 704 (H. Brazer ed. 1982);
Kleine 7, 14, n.95.
    We have, supra, at Z, already concluded that sales (as a measure of
market demand) do have a profound impact upon the amount of an enterprise's
value added, and therefore reject the complete exclusion of sales as
somehow resulting in more accurate apportionment.  We further reject this
critique because it cannot distinguish application of the threefactor
formula to a VAT from application to an income tax.  In fact, nearly
identical criticisms were levied against the three-factor formula as a
method for apportioning income by economists who theorize that income (like
value added) is the product of labor and capital, and that the marketplace
contributes nothing to production of income.  See Studenski, The Need for
Federal Curbs on State Taxes on Interstate Commerce: An Economist's
Viewpoint, 46 Va. L. Rev. 1121, 1131-1132 (1960); Harriss, Economic Aspects
of Interstate Apportionment of Business Income, 37 Taxes 327, 362-363
(1959); Harriss, Interstate Apportionment of Business Income, 49 Am. Econ.
Rev. 398, 400 (1959).  If it were not for their age, these criticisms could
have been taken almost verbatim from Trinova's brief:

E"[S]ales-by-destination are not a proper allocation factor9.9.9.9.  Taken
by themselves, they do not necessarily represent the location of the
company's productive income-creating effort.  Only the location of the
company's capital and labor, which may be wholly different from the
destination of the sales, identifies the location of that effort and hence
the situs for the imposition of a state income tax upon it."  Studenski,
supra, at 1131-1132.
F

    Despite such criticism, the Uniform Division of Income for Tax Purposes
Act decided upon an income apportionment formula that included sales, and
the importance of sales in generating value has been acknowledged by this
Court.  Container Corp., 463 U.9S., at 183.  Thus, as we responded to a
similar argument in Moorman Mfg. Co., whatever the merit of Trinova's
argument that sales do not contribute to value added "from the standpoint
of economic theory or legislative policy, it cannot support a claim in this
litigation that [the State] in fact taxed profits not attributable to
activities within the State during the yea[r 1980]."  437 U.9S., at 272.
Trinova gives no basis for distinguishing the same arguments that were
pressed, and rejected, with regard to the apportionment of income.  We
could not accept Trinova's argument that the sales factor distorts
Michigan's apportionment formula without rejecting our precedents which
approve the use of the same formula to apportion income.
    As we find no distortion caused by the three-factor formula, it follows
that the Michigan SBT does not tax "value earned outside [Michigan's]
borders."  ASARCO Inc. v. Idaho Tax Comm'n, 458 U.9S. 307, 315 (1982).  The
argument that the value was added in Ohio, by labor and capital, and that
no value has been added in Michigan assumes that value added is subject to
geographic ascertainment and assumes further the inappropriateness of a
sales factor in apportionment.  For the reasons we have given, we reject
both arguments.
    We need not say for certain which method--unadjusted apportionment by
the three-factor formula ($19,838,700), apportionment by Trinova's
alternative two-factor formula ($360,213), Trinova's Jones & Laughlin
apportionment urged in state court (-$2,042,458), or the adjusted tax base
as calculated in Trinova's original 1980 return ($12,492,671)-gives the
most accurate calculation of Trinova's value added in Michigan.  Trinova
has not convincingly demonstrated which figure is most accurate.  Trinova
gives no estimate of the value added that would take account of both its
Michigan sales activity and Michigan market demand for its products.
Michigan, on the other hand, has consistently applied a formula, the
elements of which appear to reflect a very large share of the activities by
which value is generated, with further relief for labor intensive taxpayers
such as Trinova.  Trinova has failed to meet its burden of proving "by
`clear and cogent evidence,'9" Moorman Mfg. Co., 437 U.9S., at 274, that
the State of Michigan's apportionment provides a distorted result. {10}

NC
D Trinova also urges that the Michigan SBT should be struck down because it
discriminates against out-of-state businesses in violation of the Commerce
Clause.  Trinova cannot point to any treatment of in-state and out-of-state
firms that is discriminatory on its face, as in the cases it cites.  See,
e.9g., Westinghouse Electric Corp. v. Tully, 466 U.9S. 388, 393 (1984) (tax
credit was limited to gross receipts from export products shipped from a
regular place of business of the taxpayer within New York); Boston Stock
Exchange v. State Tax Comm'n, 429 U.9S. 318, 324-328 (1977) (tax facially
discriminated against transactions on securities exchanges located outside
of New York, and had been enacted in an effort to discourage growth of such
exchanges); Halliburton Oil Well Cementing Co. v. Reily, 373 U.9S. 64
(1963) (sales tax exempted isolated sales within state, but use tax lacked
a similar exemption for similar isolated sales outside of the state).
    In the absence of any facial discrimination, Trinova recalls our
statement in American Trucking Ass'ns v. Scheiner, 483 U.9S. 266, 281
(1987), that "the Commerce Clause has a deeper meaning that may be
implicated even though state provisions .9.9. do not allocate tax burdens
between insiders and outsiders in a manner that is facially
discriminatory."  The Commerce Clause requires more than mere facial
neutrality.  The content of that requirement is fair apportionment.  The
"deeper meaning" to which American Trucking refers is embodied in the
requirement of fair apportionment, as expressed in the tests of internal
and external consistency.  Other than the vague accusation of
discrimination, Trinova presents no other standard by which we might
consider the constitutionality of the Michigan SBT.
    In further support of its discrimination argument, Trinova relies upon
the 1987 statement of Michigan's Governor that the SBT was enacted "9`to
promote the development and investment of business within Michigan.'9"
Executive Message of Michigan Governor James J. Blanchard to the Michigan
Supreme Court, Nov. 6, 1987, App. to Pet. for Cert. 73a.  This statement
helps Trinova not at all.  It is a laudatory goal in the design of a tax
system to promote investment that will provide jobs and prosperity to the
citizens of the taxing state.  States are free to "structur[e] their tax
systems to encourage the growth and development of intrastate commerce and
industry."  Boston Stock Exchange, supra, at 336-337.  Although Trinova
repeats the Governor's statement in an attempt to demonstrate an
impermissible motive on the part of the State, all the contemporaneous
evidence concerning passage of the SBT suggests a benign motivation,
combined with a practical need to increase revenues. {11}  Neither Trinova
nor the secondary sources it relies upon present any evidence that the SBT
was inspired as a way to export tax burdens or import tax revenues.

CIV
D In reviewing State taxation schemes under the Commerce Clause, we attempt
"to ensure that each State taxes only its fair share of an interstate
transaction."  Goldberg v. Sweet, 488 U.9S. 252, 260-261 (1989).  We act as
a defense against state taxes which, whether by design or inadvertence,
either give rise to serious concerns of double taxation, or attempt to
capture tax revenues that, under the theory of the tax, belong of right to
other jurisdictions.  We have always "declined to undertake the essentially
legislative task of establishing a `single constitutionally mandated method
of taxation.'9"  Id., at 261, quoting Container Corp., 463 U.9S., at 171.
We do not say today whether other states should adopt a value added tax, or
whether Michigan's three-factor formula is the only acceptable method of
apportionment.  We do hold that, as applied to Trinova during the tax year
at issue, the Michigan SBT does not violate the Due Process or Commerce
Clauses of the Constitution.
    The judgment of the Supreme Court of Michigan is
GAffirmed.
G Justice Souter took no part in the consideration or decision of this
case.
T
 
 
 
 
 

------------------------------------------------------------------------------
1
    9In calculating value added, a firm's use of capital is represented by
depreciation.  Depreciation is the reduction in value of a firm's assets,
through wear and tear, obsolescence, or other factors, and thus roughly
measures consumption of capital.  See McGraw-Hill Dictionary of Modern
Economics 130 (3rd ed. 1983); P. Samuelson & W. Nordhaus, Economics 902
(12th ed. 1985).

2
    9See, e.9g., Aaron, Introduction and Summary, in The Value-Added Tax:
Lessons from Europe 1, 2 (H. Aaron ed. 1981) (hereinafter Aaron); Haughey
1018; Special Committee on the Value-Added Tax of the Section of Taxation,
American Bar Association, The Choice Between Value-Added and Sales Taxation
at Federal and State Levels in the United States, 29 Tax Lawyer 457, 459
(1976) (addition and subtraction methods "reac[h] the same result by the
opposite means"); SBT Analysis 20 (addition and subtraction are "two
alternative, but equivalent ways of calculating value added.9.9.9.  The
important point is that, conceptually, these two calculations are equal").

3
    9The nations of the European Economic Community (EEC) each levy a value
added tax under yet a third method, as a multi-stage sales tax.  See
generally, Aaron.  Under the EEC system, the bakery in our example would be
taxed on each sale of bread, and would receive a credit for each purchase
of materials going into production of the bread.  Similarly, at each other
link in the chain of production and distribution, tax is assessed on sales,
but credit is provided on purchases.  This multi-stage sales tax system
places the burden on the taxpayer to demonstrate that it did, in fact,
purchase goods for which it requests a credit.  The multi-stage sales tax
version of the VAT has been advocated as promoting tax compliance, though
the evidence does not necessarily support this view.  See Oldman & Woods,
Would a Value-Added Tax System Relieve Tax Compliance Problems, in Income
Tax Compliance: A Report of the ABA Section of Taxation Invitational
Conference on Income Tax Compliance 317 (1983) (multistage consumption tax
VAT has traditionally been regarded as selfenforcing because the tax credit
mechanism is said to induce firms to report transactions accurately).
    The requirement of "fiscal frontiers" to record and tax interstate
transactions makes the multi-stage sales tax approach impracticable for an
individual state.  McLure, State and Federal Relations in the Taxation of
Value Added, 6 J. Corp. L. 127, 130-131 (1980); see also Haughey 1025
("invoice credit method is not workable in a subeconomy without the legal
authority and means to control the flow of imports and exports").
    On international transactions, the EEC's VATs are assessed in the
jurisdiction of destination.  As a result, no tax is applied on exports,
while full tax is applied to imports.  See id., at 1024-1025; Aaron 4.  The
destination principle does not, however, purport to determine whether value
was added in the jurisdiction of destination, or the jurisdiction of
origin.

4
    9The SBT was not Michigan's first experiment with a value added tax.
Between 1953 and 1967, Michigan had utilized a Business Activities Tax
(BAT) similar to the Michigan SBT.  Although the BAT was a subtraction
method VAT, and permitted different adjustments than the SBT, the BAT tax
base included "a company's payroll, profits, and capital outlay less
depreciation allowed," Lock, Rau, & Hamilton, The Michigan Value-Added Tax,
8 Nat. Tax J. 357, 363 (1955), and was apportioned among states by the same
three-factor formula that is challenged here.  See Mich. Stat. Ann.
997.557(1)-7.557(24) (Supp. 1955), repealed, 1967 Mich. Pub. Acts 281.  The
Michigan Supreme Court upheld the BAT against a challenge on facts
remarkably similar to those presented here by Trinova.  Armco Steel Corp.
v. State, 359 Mich. 430, 102 N.9W. 2d 552, 555-556 (Ohio corporation had
nominal Michigan property and payroll, but substantial Michigan sales).  We
dismissed an appeal of the judgment in Armco for want of a substantial
federal question.  Armco Steel Corp. v. Michigan, 364 U.9S. 337 (1960).
The arguments in that case focused on whether the BAT was best
characterized as a tax on income or a tax on gross receipts, with the
concern that under our jurisprudence of the time a "direct" tax on gross
receipts from interstate commerce would be unconstitutional.

5
    9"Business activity" is broadly defined as "a transfer of legal or
equitable title to or rental of property, whether real, personal, or mixed,
tangible or intangible, or the performance of services, or a combination
thereof, made or engaged in, or caused to be made or engaged in, within
this state, whether in intrastate, interstate, or foreign commerce, with
the object of gain, benefit, or advantage, whether direct or indirect, to
the taxpayer or to others, but shall not include the services rendered by
an employee to his employer, services as a director of a corporation, or a
casual transaction.9.9.9."  Mich. Comp. Laws 99208.3 (1979).

6
    9Any taxpayer can, in the alternative, calculate its adjusted tax base
as total gross receipts multiplied by the apportionment figure (derived
using the three-factor formula) divided by 2.  This figure is then
multiplied by the 2.35% tax rate to give actual tax liability.  Mich. Comp.
Laws 99208.31(2) (1979).  Under this alternative calculation, no firm's
Michigan SBT liability will ever exceed 1.175% of apportioned gross
receipts.

7
    9Trinova could have calculated its tax liability under the alternative
gross receipts method, Mich. Comp. Laws 99208.31(2) (1979), as follows:
Total gross receipts ($391,065,866) multiplied by Michigan apportionment
factor (8.9717%) divided by two (equals $17,542,628) multiplied by 2.35%
equals tax liability of $412,251.  This figure amounts to less than 0.4% of
Trinova's Michigan sales.  Of course, Trinova did not use this method, as
it was required to pay only $293,578 (or 0.28% of Michigan sales) under the
apportionment method challenged here.

8
    9The amended return proposed that Trinova's company-wide compensation
and depreciation be excluded from the pre-apportionment tax base, and
actual Michigan compensation and depreciation be added back into the
apportioned tax base, as follows:

    Total Tax Base--statutory formula: $221,125,319

    Deduct Compensation ($226,356,271)  Deduct Depreciation ($23,262,909)


    Trinova's Proposed Total Tax Base: ($28,493,861)

    Apportionment (8.9717%) ($2,556,384)  Add Michigan Compensation
$511,774  Add Michigan Depreciation $2,152


    Apportioned Tax Base: ($2,042,458)

433 Mich. 141, 147, n.94, 445 N.9W. 2d 428, 431, n.94 (1989).

9
    9Trinova's proposed two-factor apportionment differs drastically from
the apportionment Trinova requested in the Michigan state courts.  Under
the approach Trinova took in state court, following Jones & Laughlin, 145
Mich. App. 405, 377 N.9W. 2d 397, Trinova's apportioned tax base would be
-$2,042,458.  See n.98, supra.  Under the two-factor formula that Trinova
now urges upon us, it is $360,213.

10
    9As an alternative grounds for upholding the tax, Michigan reminds us
that, instead of taxing value added, it could have taxed gross receipts of
sales into Michigan.  We have repeatedly upheld such taxes.  Standard
Pressed Steel Co. v. Washington Revenue Dept., 419 U.9S. 560, 564 (1975);
General Motors Corp. v. Washington, 377 U.9S. 436, 448 (1964); McGold rick
v. Berwind-White Coal Mining Co., 309 U.9S. 33, 58 (1940).  While we accept
the analogy Michigan has drawn between a VAT and an income tax, we
recognize that the SBT also bears some similarities to a grossreceipts tax.
Further, the SBT's alternative method of taxation (based upon gross
receipts) might provide an additional limit on any distortion or
possibility that out-of-state values might be taxed.  See n.96, supra.  In
light of our disposition, we need not address these arguments.

11
    9According to Kleine, proponents of the SBT argued as follows: (1)
because of Michigan's volatile economy, the State's corporate income tax
had proven unpredictably cyclical, and therefore a poor source of revenue.
The SBT would provide a much broader tax base, and thus prove a more stable
revenue source; (2) the SBT would lessen the tax burden on capital, thereby
encouraging new investment; (3) the SBT would replace numerous taxes,
resulting in less paperwork for both the taxpayer and the tax collector;
(4) the SBT would not discriminate against businesses on the basis of their
forms of organization; and (5) the SBT would tax inefficient and efficient
firms equally for their use of government services, whereas an income tax
would burden more heavily efficient, highly profitable firms.  In addition,
at the time of the SBT's enactment, Michigan faced a fiscal crisis.  The
legislature provided that the new SBT would overlap with the old corporate
franchise tax, resulting in additional cash flow of $180 million.  Kleine
20-23.  The argument that a VAT would permit "exporting" the tax to
taxpayers outside the state "was not used to any great extent by the
proponents of the Michigan [SBT]."  Id., at 23.





Subject: 89-1106--CONCUR, TRINOVA CORP. v. MICHIGAN DEPT. OF TREASURY

        SUPREME COURT OF THE UNITED STATES


No. 89-1106



ATRINOVA CORPORATION, PETITIONER v. MICHIGAN DEPARTMENT OF TREASURY

Bon writ of certiorari to the supreme court of michigan

C[February 19, 1991]



A Justice Scalia, concurring in the judgment.

B As the Court notes ante, at 24, the Michigan single business tax is not
facially discriminatory.  Since I am of the view that this suffices to
comply with the requirements of the Commerce Clause, see Amerada Hess Corp.
v. Director, Div. of Taxation, N.9J. Dept. of Treasury, 490 U.9S. 66, 80
(1989) (Scalia, J., concurring in judgment); Tyler Pipe Industries Inc. v.
Washington State Dept. of Revenue, 483 U.9S. 232, 265 (1987) (Scalia, J.,
concurring in part and dissenting in part), I would forgo the additional
Commerce Clause analysis articulated in Complete Auto Transit, Inc. v.
Brady, 430 U.9S. 274, 279 (1977).  Some elements of that analysis, however,





Subject: X, 89-1106--DISSENT



TRINOVA CORP. v. MICHIGAN DEPT. OF TREASURY

        SUPREME COURT OF THE UNITED STATES


No. 89-1106



ATRINOVA CORPORATION, PETITIONER v. MICHIGAN DEPARTMENT OF TREASURY

Bon writ of certiorari to the supreme court of michigan

C[February 19, 1991]



A  Justice Stevens, with whom Justice Blackmun joins, dissenting.

B  Although the parties refer to Michigan's "Single Business Tax" (SBT) as
a "Value Added Tax" (VAT), that term does not appear in the text of the
statute.  The text of the relevant Act describes the SBT as a tax on
"certain commercial, business, and financial activities."9 {1}  As a
practical matter, Michigan's SBT is nothing more than an amalgam of three
separate taxes: a tax on payroll, a tax on depreciable fixed assets, and a
tax on income.  Payroll and depreciation represent over 90 percent of the
SBT tax base, and the productive activities that are measured by payroll
and depreciation take place at geographic locations that are readily
identifiable.  Because Michigan's SBT uses an apportionment formula to tax
a portion of those activities occurring outside Michigan, I depart from the
Court's analysis and conclude that the state taxation scheme violates
established principles of due process.

NI
D  Petitioner Trinova's executive offices and manufacturing facilities are
located in Ohio.  Most of its employees live and work in Ohio.  In fact,
significantly less than one percent of Trinova's capital assets and labor
were employed in Michigan in 1980. {2}  The company operated at a
substantial loss in that year.  The question presented is whether the fact
that 26 percent of Trinova's unprofitable sales were made to Michigan
customers provides a constitutionally sufficient justification for the
State to attribute to Michigan (and thus to tax) approximately nine percent
of Trinova's productive activities, almost all of which actually occurred
in Ohio.

    In upholding the constitutionality of the SBT against a Due Process
Clause challenge, the Court today concludes that even though the bulk of
Trinova's property and payroll are located outside Michigan, it does not
follow that the bulk of its value-adding activities are located outside
Michigan and thus are not attributable to or taxable by Michigan.  Rather,
the Court assumes that the value added to a product is largely contingent
upon the revenue that the product generates when it is sold in the
marketplace.  Because the value added by Trinova's use of labor and capital
in Ohio is not realized until Trinova's product is sold in Michigan and the
product is given market value by consumers, the Court concludes that
Michigan's sales contribute greatly to the value of Trinova's product and
thus that allowing a portion of the value added by Trinova's business
activities in Ohio to be attributed to Michigan through use of an
apportionment formula is justified.

    The Court's assumption that value added from labor and capital is not
realized until the product is sold, however, is simply wrong.  Finished
goods, even though stored in a warehouse and not yet sold, are more
valuable than raw materials.  Moreover, under the Michigan statute, the
revenues generated by the sales of the finished product are reflected in
the net income component of the tax base.  Thus, in this case, because
Trinova operated at a loss, the value added by labor and capital is
reduced, rather than enhanced, by the ultimate sales made in Michigan.  It
necessarily follows that allowing Michigan to apportion out-of-state
expenses incurred for fixed assets and labor on the basis of Michigan sales
in effect allows Michigan to tax extraterritorial business activity.

    Under this Court's due process jurisprudence, a State may
constitutionally tax only those interstate business activities or income to
which it has a rational nexus.  See Container Corp. of America v. Franchise
Tax Bd., 463 U.9S. 159, 165166 (1983).  However, in the context of state
income taxes on "unitary" interstate businesses, our cases allow States to
deviate from the fixed rule of geographic accounting in favor of a more
flexible system of formulary apportionment.  In so doing, we have cautioned
that "[t]he functional meaning of this requirement [of a rational nexus
between the taxing State and the taxed activities] is that there be some
sharing or exchange of value not capable of precise [geographic]
identification or measurement .9.9. which renders formula apportionment a
reasonable method of taxation."  Id., at 166.

    The Court today extends its analysis upholding the constitutionality of
income apportionment as an exception to the general rule of geographic
accounting to situations in which the original justification for the use of
an imprecise apportionment formula no longer holds.  Unlike the income of a
unitary business, which we before have recognized may not be precisely
allocated, the two principal elements of Michigan's SBT--property and
payroll--are subject to precise geographic identification and thus do not
warrant being subject to an apportionment formula.

    The Court concedes, as it must, that far less than one percent of
Trinova's capital assets and labor were employed in Michigan in 1980, but
rejects the logical result of such analysis by concluding that it does not
necessarily follow that far less than one percent of Trinova's "value
added" can be precisely identified as having been realized outside
Michigan.  Instead, the Court concludes that the value added by Tri nova's
factors of production located outside of Michigan cannot be precisely
determined until the ultimate product is sold and the market value or
revenue that the product commands is considered.  As the Court states,
"[t]he Michigan SBT .9.9. is not three separate and independent taxes, and
Trinova cannot purport to identify the geographic source of value added by
assuming that two elements can be located in a single state while the third
cannot."  Ante, at 14.  Rather, "[i]n a unitary enterprise, compensation,
depreciation and profit are not independent variables to be adjusted
without reference to each other.  If Trinova had paid an additional $100
million in compensation during 1980, there is no way of knowing whether, or
to what extent, value added would have increased.  In fact, value added
would not have increased so long as revenues did not increase."  Ante, at
15 (emphasis added).

    Driving the Court's analysis is the recognition that Trinova in 1980
netted a loss of over $42 million.  This, the Court concludes, means that
the ultimate value added by Trinova's use of labor and capital resources
was not equivalent to its actual payroll and capital expenses.  Resisting
the perceived awkwardness of finding "that Trinova added value at the
factory through the consumption of capital and labor, but that its products
somehow lost value outside of this process," ante, at 14, the Court holds
that the value added by capital and labor should not be deemed to be
realized and should not be geographically assigned until Trinova's product
is sold, and that the measure of value added by payroll and capital
expenses should be adjusted by the ultimate revenue the product generates.

NII
D  The Court's assumption that value added by property and payroll is not
realized and cannot be determined until the product is sold is belied by
the rationale underlying the VAT.  The "concept of value added .9.9. is
derived from the most basic of economic facts--the scarcity of
resources--and hence consistently measures the amount of scarce labor and
capital resources used up (and not available for use elsewhere) in every
economic activity."  See Haughey, The Economic Logic of the Single Business
Tax, 22 Wayne L. Rev. 1017, 1018 (1976).  That a product is ultimately
unprofitable does not diminish the amount of resources a company utilized
in manufacturing the product.  Nor does the value added to the economy or
gross national product by the company's purchase of labor and utilization
of capital diminish when the product is not sold or is sold for a net
loss.

    Rather, value added is fully realized at each stage of the production
process--at the stages where labor services are sold and paid for by the
company in the form of payroll expenses and where capital is consumed.  The
amount of value added at these intermediate stages of production is the
price paid for the labor services and for the capital expended.  See ibid.
(value added may be determined by "add[ing] up all of the payments paid
internally to the owners of the labor and capital used").  Regardless of
the profitability (or unprofit ability) of the ultimate product, value
added by labor and capital is not eliminated or diminished if the ultimate
product is unable to command equivalent value or revenue in the
marketplace. {3}  As the Court itself concedes early in its opinion,
"[e]ven if a business entity is unprofitable, under normal circumstances it
adds value to its products and, as a consequence, will owe some VAT."
Ante, at 3.  This immunity of the VAT base from the vagaries of the
marketplace is the basic justification for the SBT: "[B]ecause value added
does not fluctuate as widely as net income, a VAT provides a more stable
source of revenue than the corporate income tax."  Ibid.

    Concededly, under the Michigan statute, the task of calculating
precisely Trinova's value added by its capital and labor resources without
looking to its ultimate sales or profit is complicated by the
unprofitability of Trinova's business during the years in question.  Under
Michigan's method for calculating the SBT tax base, the corporation's
profit is added to the sum of labor costs and capital expenditures
(consisting of depreciation and interest expenses) and represents the value
added by the corporation's skill and entrepreneurial effort.  Insofar as
Trinova in 1980 netted a loss of over $42 million, Trinova's value added
tax base was actually reduced by "addition" of its profit to its labor and
capital costs.

    It is nevertheless clear that value added under the additive method is
realized at each stage of the production process and is undiminished if the
product suffers a net loss.  That Michigan chooses to allow a company's
value added tax base to be reduced by the extent of its unprofitability
does not in any way lead to the Court's conclusion that the value added by
labor and capital is not realized when (and where) those resources are
purchased and that the amount of that value added to the economy is not
equivalent to the price paid by the company for those resources.

    Because the value added by the two principal components of Michigan's
SBT--labor and capital--are fully realized and thus can be precisely
quantified and geographically assigned when the actual purchase of labor
services and use of capital occur, Michigan's apportionment of a company's
entire payroll and capital expenses results in the unconstitutional
taxation by Michigan of a portion of the taxpayer's extraterritorial
activities. {4}  In fact, in Trinova's case, although less than one percent
of Trinova's property and payroll expenses are incurred within its borders,
Michigan, by applying the apportionment formula to payroll and capital,
treats nine to ten percent of Trinova's labor and capital costs as if they
were in-state expenses. {5}  Because such extraterritorial taxation
violates basic principles of due process, I respectfully dissent.

T
 
 
 
 
 

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1
    9The preamble to the statute states, in part:
    "AN ACT to provide for the imposition, levy, computation, collection,
assessment and enforcement, by lien or otherwise, of taxes on certain
commercial, business, and financial activities9.9.9.9."  See Mich. Comp.
Laws 9208.1, p.94 (1986).
    The Michigan Supreme Court's explanation of the significance of the
label "value added tax" describes it as a tax upon business activity.  In
its opinion below, the Michigan court explained:
H
"In short, a value added tax is a tax upon business activity.  The act
employs a value added measure of business activity, but its intended effect
is to impose a tax upon the privilege of conducting business activity
within Michigan.  It is not a tax upon income.  MCL 208.31(4); MSA
7.558(31) (4)."  App. to Pet. for Cert. 10a.
    This Court today also states that "value added is a measure of actual
business activity."  Ante, at 3.

2
    9The Company's total payroll was $226,356,271.00; its Michigan payroll
was only $511,774.00 or less than one-fourth of one percent.  Its Michigan
depreciation was only $2,152.00, representing less than one-tenth of one
percent of its entire depreciation.

3
    9Unlike the tax bases under the value added tax schemes that are found
in European and South American countries, see ante, at 5, n.93, the tax
base under Michigan's SBT is affected by the revenues that the product
brings in only insofar as such revenues are reflected in the company's net
income, which is a component of the tax base under the additive method.  In
the foreign jurisdictions utilizing the VAT, however, the starting point
for computing the tax base is the revenue received by the taxpayer from
sales made in the taxing jurisdiction, with certain amounts exempted or
subtracted from the in-state revenues.  Although measuring value added with
reference to revenues might therefore be warranted in traditional European
models of the VAT, it is unjustified under Michigan's SBT, because the
income component of the value added tax base in Michigan already accounts
for revenues.

4
    9"The taxation of property not located in the taxing State is
constitutionally invalid, both because it imposes an illegitimate restraint
on interstate commerce and because it denies to the taxpayer the process
that is his due.  A State will not be permitted, under the shelter of an
imprecise allocation formula or by ignoring the peculiarities of a given
enterprise, to `project the taxing power of the state plainly beyond its
borders .9.9.9'  Any formula used must bear a rational relationship, both
on its face and in its application, to property values connected with the
taxing State."  Norfolk & Western R. Co. v. Missouri State Tax Comm'n, 390
U.9S. 317, 325 (1968) (footnote omitted).

5
    9The Court implies that it would be unjust to apportion Trinova's net
income without also apportioning its company-wide labor and appreciation.
Ante, at 21, n.99.  My reaction to the facts of this case is just the
opposite.  Because the apportioned share of the taxpayer's net loss far
exceeds the actual use of labor and capital in Michigan, there is no more
justification for imposing the SBT on Trinova than there would be to
collect an income tax from a taxpayer whose company-wide operations, as
well as its Michigan operations, produced a substantial net loss.
