Important Tax Cases: Moorman Manufacturing Company v. Bair and the Advent of Single-Sales Factor Apportionment

May 26, 2005

In 2005 at least 8 states considered adoption of single-sales apportionment formulas. This legislation is popular with state lawmakers as a means to boost in-state investment, since the formula allows companies to invest in physical plants, machinery and labor without increasing their corporate tax burden. If a company has 10 percent of its sales in, say, Iowa, it will pay tax on 10 percent of its income in Iowa.

As I wrote last week, however, the Commerce Clause requires a state to fairly apportion income. Does single-sales factor apportionment meet this requirement? The Supreme Court answered ‘yes’ in the case of Moorman Manufacturing Company v. Bair.

In the 1960s, an apportionment controversy erupted between an Illinois company (Moorman Manufacturing) and the state of Iowa. Moorman sued Iowa, claiming that Iowa’s single-sales apportionment formula was taxing profits earned in and already taxed by Illinois.

Writing for the majority, Justice John Paul Stevens said that

“we could not accept appellant’s argument that Iowa, rather than Illinois, was necessarily at fault in a constitutional sense. It is, of course, true that if Iowa had used Illinois’ three-factor formula, a risk of duplication in the figures computed by the two States might have been avoided. But the same would be true had Illinois used the Iowa formula.”

The Supreme Court in Moorman basically gave the states wide latitude to develop their apportionment policies, and made it clear that those policies (including the adoption of single-sales formulas) would not be disrupted absent evidence the state was taxing income out of all proportion to the companies’ in-state activities.

The dissent in Moorman argued that single-sales factor apportionment violated the Commerce Clause because it subsidizes domestic exporters by laying a heavier tax burden on those with less in-state property and payroll. With more and more states moving to adopt single-sales apportionment, however, the benefits for in-state investment will steadily diminish.


Related Articles