Harley-Davidson, Inc. v. Franchise Tax Bd.

BACKGROUND

Harley-Davidson has a nation-wide business. The Harley-Davidson enterprise is comprised of commonly owned and functionally integrated businesses, each of which is dependent on or contributes to the operation of the entire business enterprise of the group. Such an enterprise is called a unitary business.

Harley-Davidson filed an action for a tax refund, raising several issues, including a challenge under the commerce clause to the Board's requirement that interstate unitary businesses must use the combined method of reporting income and apportioning taxes, while intrastate unitary businesses may use either the combined method or the separate accounting method. The sole remaining issue is Harley-Davidson's claim that this differential treatment harms the flow of interstate commerce by providing a direct commercial advantage to intrastate unitary companies. It asserts that the federal commerce clause was violated by Revenue and Taxation Code provisions that allow intrastate unitary businesses to choose whether to compute their tax using the combined reporting method or the separate accounting method, but require interstate unitary businesses to compute their tax using only the combined reporting method.

In an earlier appeal, this court reversed an order sustaining the Board's demurrer to this issue in the complaint. ( Harley-Davidson (2015) 237 Cal.App.4th 193 , 203-208, 187 Cal.Rptr.3d 672 , ( Harley I ).) We found that this provision of California's tax system treats intrastate and interstate unitary businesses differently, but we made no finding on whether that differential treatment was discriminatory. ( Id . at pp. 203, 206, 187 Cal.Rptr.3d 672 .) We found only that Harley-Davidson adequately alleged that this differential treatment was discriminatory because it benefitted intrastate unitary businesses and burdened interstate unitary businesses. ( Id . at p. 206, 187 Cal.Rptr.3d 672 .) A demurrer must be denied where the plaintiff has alleged facts that, if true, would state a valid cause of action. ( Evans v. City of Berkeley (2006) 38 Cal.4th 1 , 6, 40 Cal.Rptr.3d 205 , 129 P.3d 394 [alleged facts deemed true]; Perez v. Golden Empire Transit Dist. (2012) 209 Cal.App.4th 1228 , 1235, 147 Cal.Rptr.3d 709 ( Perez ) [standard of review of order sustaining demurrer].)

On remand, the Board and Harley-Davidson filed cross-motions for summary judgment. The trial court granted summary judgment for the Board. The trial court found that California tax law treats in-state and out-of-state unitary

Historically, the individual entities of a unified business that operated solely within California were required to separately account for their taxable income, because there was no need for aggregation and apportionment. Some of these intrastate interdependent corporations sued the Board, contending that they were discriminated against under the equal protection clause because the intrastate businesses were not permitted to file under the combined method of reporting used by interstate unitary businesses. ( Handlery v. Franchise Tax Board (1972) 26 Cal.App.3d 970 , 982-983, 103 Cal.Rptr. 465 ( Handlery ).) The intrastate taxpayers contended that they were denied the benefits of combined reporting that were available to interstate unitary businesses. Specifically, the intrastate taxpayers alleged that they were denied the benefits of offsetting losses against gains between different entities. ( Id . at p. 984, 103 Cal.Rptr. 465 .) The appellate court found no violation of equal protection because the state tax laws had a reasonable basis. ( Id . at p. 983, 103 Cal.Rptr. 465 .) It explained, "the 'formula' apportionment

II. The Commerce Clause Prohibits Economic Protectionism and Interference with Interstate Commerce

We provided an overview of the commerce clause in Harley I :

"The commerce clause provides that '[t]he Congress shall have Power ... [¶] [t]o regulate Commerce ... among the several States.' ( U.S. Const., art. I, § 8, cl. 3.) 'Though phrased as a grant of regulatory power to Congress, the [c]lause has long been understood to have a "negative" aspect that denies the [s]tates the power unjustifiably to discriminate against or burden the interstate flow of articles of commerce.' ( Oregon Waste, supra , 511 U.S. at p. 98 [ 114 S.Ct. 1345 ].) In this negative, or dormant, aspect, 'the [c]ommerce [c]lause "prohibits economic protectionism-that is, 'regulatory measures designed to benefit in[-]state economic interests by burdening out-of-state competitors.' " ' ( Fulton Corp. v. Faulkner (1996) 516 U.S. 325 , 330 [ 116 S.Ct. 848 , 133 L.Ed.2d 796 ] ( Fulton ); Bacchus Imports, LTD v. Dias (1984) 468 U.S. 263 , 268 [ 104 S.Ct. 3049 , 82 L.Ed.2d 200 ] ['A cardinal rule of [c] ommerce [c]lause jurisprudence is that "[no] [s]tate, consistent with the [c]ommerce [c]lause, may 'impose a tax which discriminates against interstate commerce ... by providing a direct commercial advantage to local business' " '].) ...

" '[T]he first step in analyzing any law subject to judicial scrutiny under the negative [c]ommerce [c]lause is to determine whether it "regulates evenhandedly with only 'incidental' effects on interstate commerce, or discriminates against interstate commerce." ' " ( Oregon Waste , supra , 511 U.S. at p. 99 [ 114 S.Ct. 1345 ].) In this context, ' "discrimination" simply means differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter." ' ( Ibid . ) 'By contrast, nondiscriminatory regulations that have only incidental effects on interstate commerce are valid unless "the burden imposed on such commerce is clearly excessive in relation to the putative local benefits. ..." '

served by reasonable nondiscriminatory alternatives." ' ( Oregon Waste , at pp. 100-101 [ 114 S.Ct. 1345 ].)"

( Harley I , supra , 237 Cal.App.4th at pp. 201-202, 187 Cal.Rptr.3d 672 , fns. omitted.)

III. Harley I Did Not Rule on the Discriminatory Effect of California's Reporting Requirements

Harley-Davidson contends that we held in Harley I that the difference in permissible methods of reporting facially discriminated against interstate unitary enterprises. We could not have made such a decision on the bare allegations of the complaint, without determining the veracity of the allegations. We held only that "Harley-Davidson has sufficiently alleged for purposes of surviving the Board's demurrer that the differential treatment of intrastate and interstate unitary businesses is discriminatory within the meaning ascribed by commerce clause precedent." ( Harley I , supra , 237 Cal.App.4th at p. 207, 187 Cal.Rptr.3d 672 .) Harley-Davidson's complaint alleged that the option to use the separate reporting method benefitted intrastate unitary taxpayers by allowing "the ability to more efficiently use credits and net operating losses, reduced tax burden, increased administrative ease and lower compliance costs in preparing returns. ..." ( Harley I , at pp. 200-201, 187 Cal.Rptr.3d 672 .) In Harley I , we reversed the order sustaining the demurrer because if these facts were true, they stated a valid cause of action to be determined in the trial court. (See Perez , supra , 209 Cal.App.4th at p. 1235, 147 Cal.Rptr.3d 709 .)

IV. Because Harley-Davidson Has Made a Facial Challenge, It Need Not Specify the Amount of the Excess Burden on It

We reject the Board's contention that Harley-Davidson must show the amount of taxes it overpaid as a result of the alleged discriminatory statutes. We agree with Harley-Davidson that it need not show that Harley-Davidson, itself, was burdened, because it raises a facial challenge to the statutes. ( Tobe v. Santa Ana (1995) 9 Cal.4th 1069 , 1084, 40 Cal.Rptr.2d 402 , 892 P.2d 1145 .) But it must show that the different choice of reporting methods has an actual discriminatory effect on interstate commerce. "To support a determination of facial unconstitutionality, voiding the statute as a whole, petitioners cannot prevail by suggesting that in some future hypothetical situation constitutional problems may possibly arise as to the particular application of the statute .... Rather, petitioners must demonstrate that the act's provisions inevitably pose a present total and fatal conflict with applicable constitutional prohibitions." ( Ibid ., citations and internal quotation marks omitted.) It is disputed here whether the reporting requirements of California's tax law facially show a factual dispute about an inevitable, present, total and fatal conflict with the commerce clause.

The gravamen of discriminatory action is "differential treatment of in-state

We affirm the judgment of the trial court.

WE CONCUR:

McCONNELL, P. J.

HUFFMAN, J.

After independent review, we also find that there is a legitimate state interest to require combined reporting of taxable income of interstate unitary

California's combined reporting method has been found constitutional under the commerce and due process clauses for interstate unitary companies and for foreign unitary companies. ( Barclays Bank PLC v. Franchise Tax Bd. of Cal . (1994) 512 U.S. 298 , 311-312, 114 S.Ct. 2268 , 129 L.Ed.2d 244 ( Barclays ); Container Corp ., supra , 463 U.S. at pp. 164-165, 103 S.Ct. 2933 ; Butler Brothers v. McColgan (1942) 315 U.S. 501 , 506-507, 62 S.Ct. 701 , 86 L.Ed. 991 [no due process violation].)

In Barclays , a foreign international corporation claimed that California's worldwide combined reporting scheme was discriminatory, due to the compliance costs and administrative burdens it imposed on foreign unitary enterprises. ( Barclays , supra , 512 U.S. at pp. 312-313, 114 S.Ct. 2268 .) The Supreme Court found that California's tax scheme did not systematically overtax foreign corporations. ( Id . at p. 314, 114 S.Ct. 2268 .) Barclays complained of the compliance and administrative burdens it bore in preparing the combined accounting and reporting required by California. ( Id . at pp. 312-314, 114 S.Ct. 2268 .) But regulations that have only incidental effects on interstate commerce are valid. ( Oregon Waste Systems v. Dept. of Environmental Quality (1994) 511 U.S. 93 , 98, 114 S.Ct. 1345 , 128 L.Ed.2d 13 ( Oregon Waste ).) Compliance burdens are generally incidental, although they can violate the commerce clause if disproportionately imposed on out-of-state enterprises. The compliance and administrative burdens were not excessive in Barclays . ( Barclays , at p. 313, 114 S.Ct. 2268 .)

Some unitary businesses conduct business solely within California. All income is earned within California and all is subject to California tax.

In response to Handlery , the Legislature in 1980 amended the Revenue and Taxation Code to permit intrastate unitary groups to choose either the combined reporting or the separate accounting methods. ( Harley I , supra , 237 Cal.App.4th at p. 200, 187 Cal.Rptr.3d 672 .) Interstate unitary groups do not have that choice.

" 'If a restriction on commerce is discriminatory, it is virtually per se invalid,' ( Oregon Waste , supra , 511 U.S. at p. 99 [ 114 S.Ct. 1345 ] ) unless the 'justifications for discriminatory restrictions on commerce pass the "strictest scrutiny" ' ( id . at p. 101 [ 114 S.Ct. 1345 ] ; see South Central Bell Telephone Co. v. Alabama (1999) 526 U.S. 160 , 169 [ 119 S.Ct. 1180 , 143 L.Ed.2d 258 ] ( South Central Bell ) ). Accordingly, a discriminatory regulation must be invalidated unless its proponent can ' "show that it advances a legitimate local purpose that cannot be adequately

The trial court made no factual finding here about the discriminatory effect of the different reporting requirements of California's tax law. The trial court concluded that there were triable issues of fact on this question. We decline the Board's invitation to make a factual determination on direct appeal of the possibility of discriminatory effect from the disparate reporting choices.

A tax scheme that burdens the flow of interstate commerce must generally be invalidated unless "it advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives." ( Oregon Waste , supra , 511 U.S. at pp. 100-101, 114 S.Ct. 1345 .)

The trial court found that the state had a legitimate interest in requiring combined reporting for interstate unitary businesses in order to accurately measure and fairly apportion the income from all functionally integrated entities, and to prevent the manipulation and hiding of taxable income. ( Barclays , supra , 512 U.S. at p. 303, 114 S.Ct. 2268 ; see also Container Corp ., supra , 463 U.S. at p. 164, 103 S.Ct. 2933 .) The court in Container Corp. explained that separate accounting "often ignores or captures inadequately the many subtle and largely unquantifiable transfers of value that take place among the components of a single enterprise." ( Container Corp ., at pp. 164-165, 103 S.Ct. 2933 .) While these compelling reasons were stated in the context of a due process claim, they provide the same rational basis for supporting the state's legitimate interest in requiring combined reporting when it is challenged as discriminatory under the commerce clause. Harley-Davidson has, in any event, agreed that these are "worthy goals."

Nor has Harley-Davidson convinced us that prohibiting intrastate unitary companies from choosing either the solitary accounting or the combined method would be a reasonable alternative. There are no undisputed facts to support this suggestion. (See Lewis , supra , 93 Cal.App.4th at p. 116, 113 Cal.Rptr.2d 90 .) All income earned by an intrastate unitary business is taxed by California, without apportionment. Intrastate unitary businesses have less opportunity for hiding and manipulating taxable income among separate entities, because all of their income is earned and value added within the state's borders, subject to general state corporate regulation. Intrastate entities are not similarly situated to interstate entities for purposes of filing taxes. Harley-Davidson has given us no facts supporting its claim that requiring intrastate unitary businesses to always file by the combined reporting method would be a reasonable nondiscriminatory alternative.