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Tesoro loses Alaska income tax appeal State Supreme Court affirms Department of Revenue policy on taxing major companies with headquarters elsewhere Wesley Loy For Petroleum News
The Alaska Supreme Court has ruled against Tesoro in a case that helps define the extent of the state’s taxing power.
The company, headquartered in San Antonio, Texas, operates a refinery on Alaska’s Kenai Peninsula.
The case centered on Tesoro’s challenge of income taxes the state Department of Revenue assessed against the company for the years 1994 through 1998.
The department calculated Tesoro’s Alaska income by applying an apportionment formula to the company’s worldwide income.
Tesoro challenged the apportionment before an administrative law judge, then a state Superior Court judge. It lost at both levels.
The company appealed to the state Supreme Court, which issued an Oct. 25 opinion affirming the lower court.
Exhaustive proceedings The 39-page opinion does not explicitly state how much money was at stake in the case.
But it was evidently a lot, based on the scale of the legal conflict.
The proceeding before the administrative law judge, Mark T. Handley, were extensive, involving a 10-day hearing with testimony from Tesoro employees and executives, state auditors and expert witnesses familiar with Tesoro’s business activities. The administrative law judge reviewed more than 30,000 pages of documents.
He ultimately held that Tesoro and all its subsidiaries comprised a “unitary business” subject to the state’s formula tax apportionment.
The Supreme Court opinion says Tesoro had 33 subsidiary corporations organized into five business segments, including the retail and marketing segment based in Alaska. The company’s Alaska holdings included its refinery at Nikiski, and the Kenai pipeline feeding the plant.
Tesoro’s position In its tax return for 1995, Tesoro took the position that the Kenai pipeline was not unitary with the remainder of Tesoro’s business segments.
“This was the first time Tesoro had ever asserted in an Alaska tax return that its subsidiaries were not unitary with each other,” the opinion says.
In subsequent returns, the company would assert that its finance segment was not unitary with its other subsidiaries and thus not subject to taxation in Alaska at all, the opinion says.
The Department of Revenue would reject Tesoro’s theory concerning the interconnection of Tesoro’s business.
In its appeal, Tesoro argued, among other things, that Alaska’s tax scheme violated the due process and interstate commerce clauses of the U.S. Constitution.
Centralized management In 1995 and 1996, Tesoro worked two major business transactions, including the sale of part of its interest in a valuable natural gas field, the Supreme Court opinion says.
Those deals generated nearly $200 million in revenue for Tesoro’s exploration and production segment. One of Tesoro’s goals in its appeal was to “effectively ... shield the profits related to those events from taxation in Alaska,” the opinion says.
Among Tesoro’s arguments was that its subsidiaries were essentially autonomous in terms of day-to-day management.
But the Supreme Court found the company exhibited three traits of a single, unitary business: functional integration, centralization of management and economies of scale.
For example, cash management was integrated across the Tesoro subsidiaries, and Tesoro’s board was very actively engaged in the company’s Alaska business activities, the opinion says.
While the due process and interstate commerce clauses prohibit a state taxing value earned outside its borders, the opinion notes the U.S. Supreme Court has long recognized the “transfers of value” that take place among the components of multistate companies.
Thus, states may use a tax apportionment method to capture a fair part of the company’s total income, the opinion says.
The Alaska Supreme Court justices also upheld certain penalties the Department of Revenue imposed against Tesoro.
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