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California State Tax Scheme Stricken as Tax on Business Income Generated Outside the State
Description Supreme Court held that portions of California's tax rules violated the Due Process and Commerce Clauses because the state did not allow multistate firms to deduct legitimate business expenses for income generated in other states.
Topic Constitutional Law
Key Words Due Process; Commerce Clause: Taxation; Multistate Income
C A S E   S U M M A R Y
Facts "California's rules for taxing its share of a multistate corporation's income authorize a deduction for interest expense. But they permit (with only one adjustment) use of that deduction only to the extent that the amount exceeds certain out-of-state income arising from the unrelated business activity of a discrete business enterprise, i.e., income that the State could not otherwise tax." Hunt-Wesson challenged the constitutionality of this tax rule, which was upheld by California courts.
Decision Reversed. "A State may tax a proportionate share of the 'unitary' income of a nondomiciliary corporation that carries out a particular business both inside and outside that State, but may not tax 'nonunitary' income received by a nondomiciliary corporation from an 'unrelated business activity' which constitutes a 'discrete business enterprise.'" California's interest deduction offset provision is not reasonable because it constitutes impermissible taxation of income outside of the state's jurisdiction. States may not tax income arising out of interstate activities-even on a proportional basis-unless there is a "minimal connection" between such activities and the taxing state.
Citation Hunt-Wesson, Inc. v. Franchise Tax Board of California, 120 S.Ct. 1022 (2000)

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