Finding The Unitariness In The Unitary Business Concept: The New Multistate Income Tax On Enterprise Unity Predictor

• Published date: 15 December 2021
• Subject Matter: Tax, Income Tax, Corporate Tax
• Law Firm: Blue J Legal
• Author: Blue J Legal

Background

As the Supreme Court of the United States (the 'U.S. Supreme Court' or the 'Court') pointed out in Container Corp. of Am. v. Franchise Tax Bd., 'the unitary business concept is not ... so to speak, unitary: there are variations on the theme, and any number of them are logically consistent with the underlying principles motivating the approach.' While states, at least a majority of them, nowadays construe the scope of a unitary business to the broadest extent permitted under the Constitution of the United States, the U.S. Supreme Court has not set up a uniform legal standard for what qualifies as a 'unitary business.'

In Butler Brothers v. McColgan, the California and United States Supreme Courts employed the 'three unities test,' which looked to unity of ownership, unity of operation, and unity of use. The Supreme Court of the United States (the 'U.S. Supreme Court' or the 'Court') in Mobil Oil Corp. v. Commissioner of Taxes, announced that a unitary business must be characterized by significant flows of value evidenced by factors such as functional integration, centralization of management, and economies of scale. These factors provide evidence of whether the business activities operate as an integrated whole or exhibit substantial mutual interdependence.

Unitary Business Concept in the Context of Unitary Combined Reporting

Currently, more than 30 states require mandatory unitary combined reporting ('combined reporting') for taxing income purposes. The common theme of the different states' combined reporting regimes tries to capture the concept of unitary business, at least for the enterprise unity, as a single economic enterprise that is made up of a group of business entities under common ownership that are sufficiently interdependent, integrated, and/or interrelated through their activities so as to provide a synergy and mutual benefit that produces a flow of value among them.

With few exceptions, states that require combined reporting ('combined states') share similar common ownership definitions for combined reporting. However, whereas a majority of the combined states through statutory and decisional law rely on the 'Hallmarks'' test identified by the Court in Mobil to identify unitary business, the other states still focus on the unity of operations and use in Butler Bros.

Regardless of which test is used to determine unitary business, all the combined states indicate that the unitary business for combined reporting purposes must be...