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President Trump and Congressional Republicans appear eager to move onto federal tax reform given their recent failed attempt to repeal and replace the Affordable Care Act. But, enacting the first major overhaul to the Internal Revenue Code since the Tax Reform Act of 1986 will be no small task, especially considering that the proposed legislation greatly differs in its effects on corporate taxpayers.

Statutory definitions often carry ambiguous terms and subtle distinctions. However small these distinctions may seem, their interpretation can mean millions in state tax.  In Massachusetts, for example, multistate corporations generally apportion their business income using a three-factor formula based on a property factor, a payroll factor, and a double-weighted sales factor.  However, certain out-of-state corporations, like “manufacturing corporations” or “mutual fund service corporations,” may be required to apportion their business income using Massachusetts’s single-sales factor apportionment formula.  In the event a single-sales factor apportionment formula applies, an out-of-state company’s Massachusetts corporate excise tax liability may increase, as none of that company’s out-of-state property and payroll expenses are accounted for in apportioning income.          

The recent Harley-Davidson opinion from the Superior Court of California, County of San Diego is an alarming example of why it is important to apply the appropriate constitutional standard in state tax cases.  In a Commerce Clause challenge, where the taxpayer argued a California statute discriminated against interstate commerce, both the California Appellate Court and the trial court applied Equal Protection standards in their Commerce Clause analyses.  In doing so, the courts upheld an otherwise discriminatory tax scheme on the grounds that it furthered the state’s legitimate interests in generating revenue and ensuring income is fairly apportioned among the several states.  Such a holding effectively guts the protections offered under the dormant Commerce Clause and highlights the analytical differences between discrimination under the Commerce Clause and discrimination under the Equal Protection Clause.