WASHINGTON, DC (April 15, 2008) – The Supreme Court handed Morrison & Foerster LLP a victory in a significant business case concerning the constitutional limitations on a State’s power to tax multistate businesses.
Morrison & Foerster represented petitioner MeadWestvaco Corporation in a dispute over whether the Due Process and Commerce Clauses preclude a State from taxing a nondomiciliary business on a capital transaction that occurred outside of the State. The State of Illinois attempted to tax a portion of a $1 billion capital gain from MeadWestvaco’s sale of its separate division Lexis/Nexis. The state appellate court sustained the state tax, but the Supreme Court of the United States vacated that decision.
Writing for a unanimous Court, Justice Alito explained that where a State seeks to tax a nondomiciliary corporation for its activities that occur outside the taxing state, such as the sale of MeadWestvaco’s Lexis/Nexis investment, the Court “must determine whether ‘intrastate and extrastate activities formed part of a single unitary business.’”
The Court noted that, contrary to these principles, the state appellate court created an “operational purpose” exception to the unitary business principle, by expanding upon Supreme Court decisions indicating that certain assets can be part of a unitary business if they serve an operational function to that business. The Court rejected the Illinois court’s attempt to so expand the unitary business test, and held that “[w]here, as here, the asset in question is another business, we have described the ‘hallmarks’ of a unitary relationship as functional integration, centralized management, and economies of scale.”
Justice Thomas filed a concurring opinion.
This decision is significant because States have, in recent years, sought to expand the requirements of the unitary business test by creating a separate and expanded operational function or operational purpose test. Under the ruling issued today, some of these state taxes may have exceeded a State’s constitutional authority to tax multistate businesses and may require state courts to revisit prior rulings.
Morrison & Foerster partner and chair of the state and local tax department Paul H. Frankel is counsel of record for petitioner. Argument was presented by Morrison & Foerster partner Beth S. Brinkmann.
This ruling was the third victory (and second unanimous ruling) for Morrison & Foerster as arguing counsel in October 2007 Term of the Supreme Court, all of which were significant business cases. The firm’s other two wins this Term are Rowe v. New Hampshire Motor Transport Ass’n, No. 06-457 (unanimously decided February 20, 2008), concerning the scope of federal preemption under the Federal Aviation Administration Authorization Act of 1994, and Hall Street Associates, L.L.C. v. Mattel, Inc., No. 06-989 (decided March 31, 2008), concerning the scope of judicial review under the Federal Arbitration Act.
Morrison & Foerster also argued a fourth case before the Supreme Court in October 2007 in Klein & Co. Futures, Inc. v. Board of Trade of the City of New York, No. 06-1265. In that case, Morrison & Foerster successfully petitioned for a writ of certiorari and presented argument on behalf of petitioner Klein & Co. Futures, Inc. The case was dismissed by agreement of the parties after oral argument.