Alaska Supreme Court Holds Petroleum Company’s Business Was Unitary, Alternative Apportionment Formula Was Reasonable

The Alaska Supreme Court has held that the taxation of a petroleum company's worldwide income, including the income of its out-of-state subsidiaries, by applying formulary apportionment did not violate the Due Process or Commerce Clauses of the U.S. Constitution because the company's business was unitary.1 Also, the Court determined that the company did not have standing to challenge the internal consistency of Alaska's apportionment scheme providing two possible three-factor formulas because the company did not show that it had suffered harm. Furthermore, application of the alternative three-factor apportionment formula to the company was reasonable.2

Background

The taxpayer, a petroleum company headquartered in Texas, had 33 subsidiaries that were organized into five business segments: (i) the Exploration and Production (E&P) segment based in Texas and Bolivia; (ii) the Retail and Marketing (R&M) segment based in Alaska; (iii) the Marine Services segment based in Louisiana and Texas; (iv) the Corporate segment based in Texas; and (v) the Finance segment based in Texas.

From the time the taxpayer began doing business in Alaska in 1969 until 1994, it filed its tax returns as a unitary business. To compute taxable income, the taxpayer used the standard three-factor apportionment formula with property, payroll and sales factors. In 1995, the taxpayer purchased a pipeline company that serviced its Alaska refinery and became subject to a statutory alternative apportionment formula for companies that transport oil or gas by pipeline.3 The taxpayer took the position on its 1995 tax return that the pipeline company was not unitary with the taxpayer's other business segments. As a result, the taxpayer apportioned the pipeline company's income using the alternative formula and the income from its other subsidiaries using the standard formula. For the 1996 and 1997 tax years, the taxpayer further asserted that its Finance segment was not unitary with the other subsidiaries and was not subject to Alaska tax.

As a result of an audit of the tax returns for 1994 and 1995, the Department determined that all of the taxpayer's subsidiaries were unitary and subject to the statutory alternative apportionment formula. The taxpayer subsequently filed its 1998 tax return and asserted that the pipeline company and subsidiaries within R&M were not unitary with the other subsidiaries.4 The Department audited the tax returns for 1996 through 1998 and again determined that all of the subsidiaries were unitary. During the interval between the audits, the Alaska Attorney General issued an opinion that questioned the constitutionality of the statutory alternative apportionment formula as applied to businesses that produce oil or gas in Alaska but transport it out of state. The Department responded with an advisory letter5 explaining its intention to use discretionary authority to allow a taxpayer that both produces and transports oil or gas in any jurisdiction to use the alternative threefactor formula based on property, sales and extraction.6

After challenging the assessments during informal conferences with the Department, the taxpayer filed appeals before an administrative law judge and then the superior court. At each stage, the adjudicator agreed with the Department that: (i) the...