BRIEF OF APPELLEE AT&T CORP.

Transcription

1 E-Filed Document Dec :55: CA Pages: 56 IN THE SUPREME COURT OF THE STATE OF MISSISSIPPI No CA MISSISSIPPI DEPARTMENT OF REVENUE F/K/A MISSISSIPPI STATE TAX COMMISSION APPELLANT VS. AT&T CORP. APPELLEE On Appeal from the Chancery Court of Hinds County, Mississippi First Judicial District Civil Action No. G O/3 BRIEF OF APPELLEE AT&T CORP. (ORAL ARGUMENT REQUESTED) John F. Fletcher (MB #100463) Adam Stone (MB #10412) Kaytie M. Pickett (MB #103202) JONES WALKER LLP 190 East Capitol Street, Suite 800 Jackson, Mississippi Telephone: (601) Telecopier: (601) Attorneys for Appellee AT&T Corp. {JX }

2 IN THE SUPREME COURT OF THE STATE OF MISSISSIPPI No CA MISSISSIPPI DEPARTMENT OF REVENUE F/K/A MISSISSIPPI STATE TAX COMMISSION APPELLANT VS. AT&T CORP. APPELLEE CERTIFICATE OF INTERESTED PARTIES The undersigned counsel of record certifies that the following listed persons have an interest in the outcome of this case. These representations are made in order that the justices of the Supreme Court and/or the judges of the Court of Appeals may evaluate possible disqualification or recusal: 1. The Mississippi Department of Revenue (f/k/a Mississippi State Tax Commission), Defendant/Appellant; 2. AT&T Inc., Parent of Plaintiff/Appellee AT&T Corp. and affiliates; 3. AT&T Corp., Plaintiff/Appellee; 4. John F. Fletcher, Jones Walker LLP, attorney for Plaintiff/Appellee; 5. Adam Stone, Jones Walker LLP, attorney for Plaintiff/Appellee; 6. Kaytie M. Pickett, Jones Walker LLP, attorney for Plaintiff/Appellee; 7. Laura H. Carter, Mississippi Department of Revenue, attorney for Defendant/Appellant; 8. Bridgette T. Thomas, Mississippi Department of Revenue, attorney for Defendant/Appellant; 9. Hon. William H. Singletary, Chancery Court of the First Judicial District of Hinds County, Mississippi; and 10. Hon. Jim Hood, Attorney General of the State of Mississippi. Respectfully submitted, this 10th day of December /s/ John F. Fletcher John F. Fletcher {JX } i

3 TABLE OF CONTENTS CERTIFICATE OF INTERESTED PERSONS... i TABLE OF AUTHORITIES... iv STATEMENT REGARDING ORAL ARGUMENT...1 STATEMENT OF THE ISSUES...1 STATEMENT OF THE CASE...1 A. Nature of the Case...1 B. Course of the Proceedings...3 C. Disposition in the Court Below...4 D. Statement of Facts...5 SUMMARY OF THE ARGUMENT...8 ARGUMENT...9 I. Standard of Review...9 II. The Chancery Court s Grant of Summary Judgment Is Supported Fully by Stipulated Facts and Uncontradicted Affidavits...11 III. Overview of the Commerce Clause Jurisprudence...12 IV. The Department Mischaracterizes the Scope of Complete Auto Transit and the Very Nature of Section (4)(i)...14 V. The Limitation within Section (4)(i) Fails the Internal Consistency Test and Thereby Violates the Second and Third Prongs of Complete Auto Transit...17 A. Defining the Internal Consistency Test...18 B. Applying the Internal Consistency Test to Section (4)(i)...20 VI. VII. The Limitation Within Section (4)(i) Facially Discriminates Against Interstate Commerce and Thereby Violates the Third Prong of Complete Auto Transit...23 This Court Should Resist Any Suggestion That Section (4)(i) Promotes Tax Symmetry Or Even That Such a Concept Has Any Constitutional Significance...31 A. General Electric is Wholly Inapplicable to the Present Case...31 {JX } ii

4 B. Tax Symmetry Is a Constitutionally Meaningless Concept...35 C. The Present Case Does Not Implicate Ashland Pipeline...37 VIII. The Limitation Within Section (4)(i) Violates the Equal Protection Clause...39 IX. The Limitation Within Section (4)(i) Violates the Due Process Clause...44 CONCLUSION...46 CERTIFICATE OF SERVICE...48 {JX } iii

5 TABLE OF AUTHORITIES Cases Allied Stores of Ohio, Inc. v. Bowers, 358 U.S. 522 (1959)...40, 42, 43 Amerada Hess Corp. v. Director, Div. of Taxation, New Jersey Dept. of Treasury, 490 U.S. 66, 109 S. Ct (1989)...45 Appeal of Morton Thiokol, Inc., 864 P.2d 1175 (Kan. 1993)...33 Armco Inc. v. Hardesty, 467 U.S. 638 (1984)...2, 14, 26 Ashland Pipeline Co. v. Marx, 623 So. 2d 995 (Miss. 1993)...37, 38 Associated Industries of Missouri v. Lohman, 511 U.S. 641 (1994)...24 Bethlehem Motors Corp. v. Flynt, 256 U.S. 421 (1921)...39 Boston Stock Exchange v. State Tax Comm n, 429 U.S. 318 (1977)...2, 24 Cade v. Beard, 130 So. 3d 77 (Miss. 2014)...11 Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564 (1997)...14, 24, 25, 27, 28, 33, 34 Caterpillar Financial Services Corp. v. Whitley, 680 N.E. 2d 1082 (Ill. App. Ct. 1997)...36 Chemical Waste Mgmt., Inc. v. Hunt, 504 U.S. 334 (1992)...24, 26 Colgate-Palmolive Co. v. Florida Dept. of Revenue, 988 So. 2d 1212 (Fla. Dist. Ct. App. 2008)...35 Commonwealth Brands, Inc. v. Morgan, 110 So. 3d 752 (Miss. 2013)...9, 10, 13, 18, 19 Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)... passim Comptroller of Treasury of Maryland v. Wynne, U.S., 135 S. Ct. 1787, 191 L. Ed. 2d 813 (2015)...12, 13, 14, 17, 18, 33, 34 Conoco, Inc. v. Taxation and Revenue Dept. of New Mexico, 931 P.2d 730 (N.M. 1997)...36 D.D.I. v. State, 657 N.W. 2d 228 (N.D. 2003)...24, 28, 29 Dept. of Revenue v. Amrep Corp., 358 So. 2d 1343 (Fla. 1978)...41, 42 E.I. Du Pont de Nemours & Co. v. State Tax Assessor, 675 A.2d 82 (Me. 1996)...33, 36 Emerson Electric Co. and Subsidiaries v. Tracy, 735 N.E. 2d 445 (Ohio 2000)...36 {JX } iv

6 Farmer Bros. Co. v. Franchise Tax Board, 134 Cal. Rptr. 2d 390 (Cal. Ct. App. 2003), cert. denied, 540 U.S (Feb. 23, 2004)...29, 30 Fujitsu IT Holdings, Inc. v. Franchise Tax Board, 15 Cal. Rptr. 3d 473 (Cal. Ct. App. 2004)...36 Fulton Corp. v. Faulkner, 516 U.S. 325 (1996)...12, 14, 24, 25, 26, 28 General Electric Co., Inc. v. Comm r, New Hampshire Dept. of Revenue, 914 A.2d 246 (N.H. 2006)...31, 32, 33, 34, 35 General Motors Corporation v. Franchise Tax Board, 16 Cal. Rptr. 3d 41 (Cal. Ct. App. 2004) Hanover Fire Ins. Co. v. Carr, 272 U.S. 494 (1926)...40 Henneford v. Silas Mason Co., 300 U.S. 577 (1937)...25 Hutchinson Technology, Inc. v. Comm n of Revenue, 698 N.W. 2d 1 (Minn. 2005)...36 Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434 (1979)...33 Johnson v. Sysco Food Servs., 86 So. 3d 242 (Miss. 2012)...10 Kaigler v. City of Bay St. Louis, 12 So. 3d 577 (Miss. Ct. App. 2009)...38 Kraft General Foods, Inc. v. Iowa Department of Revenue and Finance, 505 U.S. 71 (1992)...33 Marx v. Truck Renting and Leasing Association, Inc., 520 So. 2d 1333 (Miss. 1987)...13 Maryland v. Louisiana, 451 U.S. 725 (1981)...15, 21 Metropolitan Life Insurance Company v. Ward, 470 U.S. 869 (1985)...39, 40, 41, 43 Miller Brothers Co. v. Maryland, 347 U.S. 340, 74 S. Ct. 535, 98 L. Ed. 744 (1954)...44 Mississippi Dept. of Revenue v. Isle of Capri Casinos, Inc., 131 So. 3d 1192 (Miss. 2014)...11 Mississippi State Tax Comm n v. Murphy Oil USA, Inc., 933 So. 2d 285 (Miss. 2006)...13, 45 Moorman Mfg. Co. v. Bair, 437 U.S. 267, 98 S. Ct. 2340, 57 L. Ed. 2d 197 (1978)...44 Norfolk & W.R. Co. v. Missouri State Tax Commission, 390 U.S. 317, 19 L. Ed. 2d 1201 (1968)...44 Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450 (1959)...2 Oklahoma Tax Comm n v. Jefferson Lines, Inc., 514 U.S. 175 (1995)...18 {JX } v

7 Oregon Waste Systems, Inc. v. Dept. of Environmental Quality, 511 U.S. 93 (1994)...12, 21, 23, 24, 25, 26 Palmer v. Biloxi Reg l Med. Ctr., Inc., 564 So. 2d 1346 (Miss. 1990)...38 Quill Corp. v. North Dakota, 504 U.S. 298, 112 S. Ct (1992)...44 South Central Bell Telephone Company v. Alabama, 526 U.S. 160 (1999)...24, 27, 28 Southern Ry. Co. v. Greene, 216 U.S. 400 (1910)...40 Standard Pressed Steel Co. v. Department of Revenue, 419 U.S. 560, 42 L. Ed. 2d 719 (1975)...44 Tennessee Gas Pipeline Co. v. Marx, 594 So. 2d 615 (Miss. 1992)...13 Thomas Truck Lease, Inc. v. Lee County ex rel. Mitchell, 768 So. 2d 870 (Miss. 2000)...13, 18 Trinova Corp. v. Michigan Dept. of Treasury, 498 U.S. 358, 111 S. Ct. 818 (1991)...44 Vincent J. Castigliola, Jr. v. Miss. Dept. of Revenue, 162 So. 3d 795 (Miss. 2015)...9, 16, 17 Weeks Dredging & Contracting, Inc. v. Mississippi State Department, 521 So. 2d 884 (Miss. 1988)...13 Western & S. Life Ins. Co. v. State Bd. of Equalization, 451 U.S. 648 (1981)...39 Wheeling Steel Corp. v. Glander, 337 U.S. 562 (1949)...40, 42 Whiting v. Univ. of S. Miss., 62 So. 3d 907 (Miss. 2011)...11 WHYY, Inc. v. Glasboro, 393 U.S. 117 (1968)...40, 42 Statutes and Rules Miss. Code Ann passim Miss. Code Ann , 16 Miss. Code Ann Miss. Admin. Code 35.III.8.06(302.01)...31 Miss. R. App. P Miss. R. Civ. P , 38 {JX } vi

8 Other Authorities U.S. Const. art. I, 8, cl , 12 U.S. Const. amend. X...39 U.S. Const. amend. XIV...39, 44 {JX } vii

9 STATEMENT REGARDING ORAL ARGUMENT Pursuant to Miss. R. App. P. 34(b), Appellee AT&T Corp. respectfully requests oral argument in this appeal. At issue is the constitutionality of the limitation within Miss. Code Ann (4)(i) excluding from gross income only those dividends received from subsidiaries having a taxable presence and filing income tax returns in Mississippi. This limitation violates numerous provisions of the United States Constitution, and multiple independent tests apply to invalidate that limitation. Accordingly, AT&T submits that oral argument will aid the Court in its determination of the constitutional issues presented by this appeal. STATEMENT OF THE ISSUES 1. Was the chancery court correct in holding that the geographic-based limitation within Miss. Code Ann (4)(i), which excludes from a taxpayer s gross income only those dividends received from subsidiaries that do business in Mississippi and file Mississippi income tax returns, while taxing dividends received from other subsidiaries lacking that in-state presence, violates the Commerce Clause of the United States Constitution? 2. Does the geographic-based limitation within Miss. Code Ann (4)(i) also violate the Equal Protection Clause and Due Process Clause of the United States Constitution? STATEMENT OF THE CASE A. Nature of the Case The Commerce Clause of the United States Constitution (U.S. Const. art. I, 8, cl. 3) prohibits states from maintaining tax schemes that discriminate against or impose excessive burdens on interstate commerce without congressional approval. States may not discriminate {JX } 1

10 between transactions on the basis of some interstate element. Boston Stock Exchange v. State Tax Comm n, 429 U.S. 318, 332, n.12 (1977). A state may not tax a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the State. Armco Inc. v. Hardesty, 467 U.S. 638, 642 (1984). Nor may a State impose a tax which discriminates against interstate commerce either by providing a direct commercial advantage to local business, or by subjecting interstate commerce to the burden of multiple taxation. Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 458 (1959). A discriminatory tax scheme may manifest itself in the form of facial discrimination or through the existence or risk of double taxation (e.g., failing the internal or external consistency tests). Each is a separate and distinct legal basis for a Commerce Clause violation under the third prong of the test set forth in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 287 (1977), which prohibits discrimination against interstate commerce. The chancery court found the limitation within Section (4)(i), which excludes from a taxpayer s gross income only those dividends received from subsidiaries that do business in Mississippi and file Mississippi income tax returns, while taxing dividends received from other subsidiaries lacking that in-state presence, to be facially discriminatory in accordance with extensive United States Supreme Court precedent. (R. 3: , R.E ). The chancery court also specifically found that the statute produced actual double taxation to certain corporations. (R. 3:425, R.E. 16). This additional finding not only supports a conclusion that the statute discriminates against interstate commerce, it also establishes that the scheme fails the second prong of the Complete Auto Transit test, which requires state taxes to be fairly apportioned. Because it fails the internal consistency test and produces actual double taxation, Section (4)(i) fails two of the tests under Complete Auto Transit and violates the Commerce Clause it is unfairly apportioned and it discriminates against interstate commerce. {JX } 2

11 AT&T also asserted in its Petition and throughout its pleadings below that Section (4)(i) violates the Equal Protection Clause and the Due Process Clause of the United States Constitution. (R. 1:9-10, 2:181, 2: ). The chancery court s Commerce Clause holding was dispositive of the case, and it did not reach these additional constitutional issues. Nonetheless, AT&T asserted and briefed the equal protection and due process issues from the outset of its administrative appeals and throughout the chancery court proceedings below, and those issues are properly before this Court as alternative grounds upon which the Court may affirm. AT&T and numerous other taxpayers have actively and openly disputed Mississippi s taxation of the dividends at issue in this case for at least twenty years, and this Court s decision will have general applicability to virtually every multi-tiered corporation doing business in Mississippi. Although this case addresses tax years 1997 through 1999, other taxpayers have active appeals pending before the Board of Tax Appeals and/or the chancery courts involving other audit cycles, as evidenced by the disclosures contained in the Department s notice of appearance. This case has attracted national attention among multistate corporate taxpayers and their advisers, as Mississippi is one of the last states to tax dividends from wholly-owned subsidiaries and is the last one, to AT&T s knowledge, imposing such an offensive geographic distinction upon that taxation. B. Course of the Proceedings AT&T is in general agreement with the items set forth in the Department s summary of the Course of the Proceedings. AT&T would note for the Court, however, that the Department has never rendered any decision or conclusion on the constitutional issues at the heart of this case. Due to the purely constitutional nature of this case, the Department specifically refrained from ruling on AT&T s defenses in the administrative hearings below, citing in support of such {JX } 3

12 refusal its absence of legal authority to do so. (R. 1:14). The chancery court was the first administrative or judicial tribunal with authority to entertain AT&T s constitutional defenses to the assessment. C. Disposition in the Court Below AT&T is in general agreement with the items set forth in the Department s summary of the Disposition in the Court below, but that statement fails to recognize key elements of the chancery court s holding and understates the scope of the chancery court s ruling and the constitutional issues before this Court. The chancery court concluded that the limitation within Section (4)(i) facially discriminates against interstate commerce in violation of the third prong of the test set forth in Complete Auto Transit, which prohibits discrimination against interstate commerce. (R. 3: , R.E ). In addition to invalidating Section (4)(i) as a facially discriminatory tax scheme, the chancery court also concluded, based on the uncontradicted evidence, that the statute results in actual double taxation of certain of AT&T s subsidiaries. (R. 3:425, R.E. 16). Specifically, the court held [i]t is clear to this Court that the subject statute is not an avoidance of double taxation, as suggested by [the] Department, as the statute is not linked to the amount of tax the distributing corporation paid and actually results in double taxation to certain distributing corporations. Id. Based on these findings, the chancery court held that the statutory provision violates the Commerce Clause. (R. 3:427, R.E. 18). It further held that the Order of the Commission, which was based on this unconstitutional provision, was, by its very nature, arbitrary and capricious. (R. 3:422, 3:427; R.E. 13, 18). The chancery court also ruled that the only appropriate remedy that would place AT&T on even footing with those taxpayers who enjoyed the subject tax benefits is to strike the offensive limitations and grant those applicable tax benefits to AT&T for {JX } 4

13 the tax years at issue. (R. 3:426, R.E. 17). AT&T has already paid over $2.7 Million in income taxes to Mississippi for the years at issue, prior to the resolution of the dividend issue. (R. 2:174, R.E. 27). Based upon the stipulations and the previous agreement between the parties, the chancery court concluded the application of the dividend exclusion resulted in no additional income tax liability for AT&T over and above what it has already paid for the relevant years. (R. 3:427, R.E. 18). In its appeal to this Court the Department did not challenge the chancery court s finding that Section (4)(i) created double taxation or the chancery court s ordered remedy that the exclusion be extended to AT&T in order to put it on an even footing with other taxpayers who enjoyed the benefits of the statute. Accordingly, those uncontested holdings are not before the Court. D. Statement of Facts The chancery court s conclusions were based squarely upon the stipulated facts submitted by the parties. In the course of its audit, the Department excluded from AT&T s gross income dividends received from subsidiaries which were deemed taxable in Mississippi in the year of the distribution (i.e., Nexus Dividends received from Nexus Subsidiaries ), but included in gross income any dividends received from subsidiaries which were deemed non-taxable in Mississippi in the year of the distribution (i.e., Non-Nexus Dividends received from Non-Nexus Subsidiaries ). (R. 2: , R.E ). Thus, the Department included in AT&T s gross income each year anywhere from roughly $1.9 Billion to $2.8 Billion of Non-Nexus Dividends while excluding all Nexus Dividends. Id. Notwithstanding the resolution of this dividend issue, AT&T has already paid over $2.7 Million of income taxes to Mississippi for the 1997 through 1999 tax years. (R. 2:174, R.E. 27). {JX } 5

14 Stipulated Fact No. 17 establishes that the Department interprets and applies Section (4)(i) to permit a recipient of an intercompany dividend to exclude that dividend from the calculation of its gross income if the distributing corporation is doing business in Mississippi in the year of the distribution and files a Mississippi income tax return for that year. (R. 2:168, R.E. 21). Stipulated Fact No. 18 establishes that, in contrast, the statute does not permit a recipient of an intercompany dividend to exclude that dividend from the calculation of its gross income if the distributing corporation is not doing business in Mississippi in the year of the distribution or did not file a Mississippi income tax return for that year. (R. 2:169, R.E. 22). Stipulated Fact No. 19 clarifies that Mississippi denies the dividend exclusion without any consideration of whether the income of the distributing corporation that gave rise to the dividends at issue had already been fully taxed by that distributing corporation s home state, state of domicile, or other states in which it conducted business and was taxable. Id. Stipulated Fact No. 20 further establishes that the Department s sole criteria in its interpretation and application of the statute is whether the distributing corporation did business in Mississippi and filed a Mississippi income tax return in the year of the distribution. Id. These undisputed facts served as the foundation for the chancery court s finding that Section (4)(i) denies taxpayers a tax benefit, the ability to deduct intercompany dividends from gross income in computing Mississippi income tax, based solely upon the choice of the taxpayer and its subsidiaries not to locate any operations in Mississippi or to file a Mississippi income tax return. (R. 3: , R.E ). The statute further disallows a valuable tax exemption based solely upon an interstate element and it clearly favors domestic corporations over foreign competitors and discourages corporations from choosing to locate their operations outside Mississippi. (R. 3:424, R.E. 15). Based on this, the chancery court concluded that the dividend exclusion statute is discriminatory in nature and on its face. Id. {JX } 6

15 The chancery court further acknowledged that [t]he Department has provided no evidence or even assertions that the dividend exclusion statute is a compensatory tax. (R. 3:425, R.E. 16). Regarding the issue of double taxation, the uncontradicted affidavit supporting AT&T s motion for summary judgment establishes that each of the Non-Nexus Subsidiaries from which AT&T received Non-Nexus Dividends had business operations during the years at issue in jurisdictions other than Mississippi. (R. 2: , AT&T R.E. 2-3). Additionally, those Non- Nexus Subsidiaries were taxable for income tax purposes in more than one state for those tax years and reported their net earnings or losses to each of the states in which they did business in those years. Id. This affidavit and the stipulations above establish that the Department applies Section (4)(i) without any consideration of whether the distributing subsidiary did business or filed Mississippi returns in preceding years when the company actually generated the earnings being distributed in the current year. 1 Nor is there any requirement that the subsidiary be profitable in the year of the distribution or even pay any tax to Mississippi in that year. Thus, despite the Department s assertions about Mississippi s presumably noble motive to avoid double Mississippi taxation, the stipulated facts reveal a total absence of any link whatsoever between Mississippi s taxation of the distributing subsidiary s operating income and its taxation of those earnings when distributed to the parent in the form of a dividend. These undisputed facts, coupled with Stipulations No above, clearly establish that Mississippi subjected the earnings of those Non-Nexus Subsidiaries to a second layer of state taxation not faced by their Nexus Subsidiary counterparts. 1 Because dividends represent the distribution of accumulated earnings and profits, they often consist of earnings generated in prior tax periods. Whether a particular taxpayer had a presence in Mississippi or filed a tax return in the year the company actually generated the earnings is not a factor in determining whether Mississippi taxes a dividend in a subsequent year. {JX } 7

16 SUMMARY OF THE ARGUMENT Section (4)(i) provides a valuable income tax benefit in the form of an exclusion from gross income of dividends received from certain subsidiaries. Mississippi restricts this benefit, however, to Nexus Dividends received from Nexus Subsidiaries which did business and filed a corporate income tax return in Mississippi in the year of the distribution. The Department includes in a taxpayer s gross income and taxes in full any Non-Nexus Dividends received from other Non-Nexus Subsidiaries lacking that in-state presence. This geographic-based limitation violates the Commerce Clause, Equal Protection Clause and Due Process Clause of the United States Constitution. The chancery court properly granted AT&T s motion for summary judgment, ruling that the limitation within Section (4)(i) discriminated against interstate commerce both facially and in nature. The chancery court also ruled that the statute was not designed to avoid double state taxation, as suggested by the Department, but instead produced actual double taxation of the earnings of certain AT&T subsidiaries. The court s grant of summary judgment was based squarely upon uncontested facts set forth in the parties extensive factual stipulations, an affidavit of AT&T s tax director which accompanied AT&T s amended motion for summary judgment, and various factual concessions made by the Department within its briefs. The Department offered no additional testimony, documents, affidavits, or other evidence to contradict the facts contained in AT&T s affidavit accompanying its motion for summary judgment or the parties stipulations. Because no genuine issue of material fact existed with respect to any of the legal issues presented, summary judgment was appropriate, and this Court must uphold the chancery court s findings. The chancery court s decision rested upon a Commerce Clause facial discrimination analysis, but the statute is equally unconstitutional when subjected to the Commerce Clause s {JX } 8

17 well-established internal consistency test. That test requires the Court to consider whether the tax is structured so that if every state were to impose an identical tax, no multiple taxation would result. Section (4)(i) unquestionably fails this test, the consequence being that the tax scheme must be found to not be fairly apportioned and to discriminate against interstate commerce, each of which alone would suffice to invalidate the limitation under the Commerce Clause. The chancery court did not reach AT&T s Equal Protection and Due Process Clause arguments, having found the Commerce Clause discrimination analysis dispositive. Nonetheless, under the well-established precedent discussed herein, the geographic-based limitation within Section (4)(i) is unconstitutional under each of those clauses. ARGUMENT I. Standard of Review This Court applies a de novo standard of review when reviewing a chancery court s grant or denial of summary judgment. Vincent J. Castigliola, Jr. v. Miss. Dept. of Revenue, 162 So. 3d 795, 801 (Miss. 2015); Commonwealth Brands, Inc. v. Morgan, 110 So. 3d 752, 758 (Miss. 2013). AT&T recognizes that in most instances a chancery court s review of an administrative agency s order or decision is subject to the more limited arbitrary and capricious standard cited by the Department in its Brief. The chancery court applied that limited standard of review and still ruled in AT&T s favor as that standard was easily satisfied. (R. 3:427, R.E. 18). In light of the specific constitutional issues presented in this case and the Department s lack of authority to entertain those defenses in an administrative hearing, however, a de novo standard likely was applicable below and should be applied by this Court. Regardless, an identical result will be obtained under either standard. {JX } 9

18 First, Mississippi s courts always review de novo issues concerning the constitutionality of a state statute. See Commonwealth Brands, 110 So. 3d at 758; Johnson v. Sysco Food Servs., 86 So. 3d 242, 243 (Miss. 2012). Unlike most tax appeals coming before the chancery court, the present case does not involve any dispute over the Department s interpretation of a statute, its application to a given set of facts, or even a disagreement over the facts which would be applied to that law. That is all fully stipulated. (R. 2: , R.E ). What sets this case apart from the typical tax controversy is that AT&T contests the constitutional validity of the statute itself. Both this Court and the chancery court always review such constitutional challenges de novo. Second, it must be recognized that in this particular case there was no Department decision or conclusion for the chancery court to review. Due to the purely constitutional nature of this case, the Department specifically refrained from ruling on AT&T s Commerce Clause, Equal Protection Clause, or Due Process Clause defenses in the administrative hearings below, citing in support of such refusal its absence of legal authority to do so. (R. 1:14; see also 2:185, AT&T R.E. 2). Considering that prior to the chancery court proceedings below, no administrative or judicial entity had rendered any determination as to the statute s constitutionality, a de novo review by definition is the only type of review that could have been performed by the chancery court. The chancery court was the first administrative or judicial tribunal having authority to entertain the constitutional issues at the heart of this matter. Even assuming this Court were to apply a more limited standard of review, it must nonetheless rule for AT&T because, as the chancery court rightfully recognized, any Department assessment or ruling which rested upon an unconstitutional statute is, by its very nature, arbitrary and capricious. (R. 3:422, 3:427; R.E. 13, 18). That departmental action, furthermore, would clearly violate AT&T s constitutional rights, thereby providing an additional basis for {JX } 10

19 overturning the Department s administrative ruling and invalidating the assessment even under the more limited standard of review. Thus, at least two of the four bases for overturning the Department s actions exist under the more restrictive arbitrary and capricious standard. II. The Chancery Court s Grant of Summary Judgment Is Supported Fully by Stipulated Facts and Uncontradicted Affidavits Summary judgment shall be rendered forthwith if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Miss. R. Civ. P. 56(c); Cade v. Beard, 130 So. 3d 77, 81 (Miss. 2014). To survive summary judgment, the opposing party may not rely on mere allegations but must set forth specific facts to show genuine issues for trial. Cade, 130 So. 3d at 81 (citing Whiting v. Univ. of S. Miss., 62 So. 3d 907, 914 (Miss. 2011)). Summary judgment is appropriately granted in tax cases. See, e.g., Mississippi Dept. of Revenue v. Isle of Capri Casinos, Inc., 131 So. 3d 1192 (Miss. 2014). The chancery court made a number of key findings regarding facial discrimination which served as the basis for its invalidation of the unconstitutional limitation within Section (4)(i). The court s grant of summary judgment is based squarely upon uncontested facts set forth in the parties extensive factual stipulations, an affidavit of AT&T s tax director which accompanied AT&T s amended motion for summary judgment, and various factual concessions made by the Department within its briefs. The Department offered no additional testimony, documents, affidavits, or other evidence to contradict the facts contained in AT&T s affidavit accompanying its motion for summary judgment or the parties stipulations. The chancery court also correctly recognized the absence of any evidence to support the Department s defense that Section (4)(i) was designed to avoid double taxation, and specifically recognized that actual double state taxation resulted from the nexus-based limitation {JX } 11

20 within Section (4)(i). It is clear to this Court that the subject statute is not an avoidance of double taxation, as suggested by the Department, as the statute is not linked to the amount of tax the distributing corporation paid and actually results in double taxation to certain distributing corporations. (R. 3:425, R.E. 16). This double taxation constitutes discrimination against interstate commerce and independently supports the court s grant of summary judgment. The chancery court was correct in concluding, based on the overwhelming and uncontradicted evidence before it, that Section (4)(i) produced double taxation of the Non-Nexus Subsidiaries earnings not suffered by the Nexus Subsidiaries. III. Overview of the Commerce Clause Jurisprudence The Commerce Clause (U.S. Const. art. I, 8, cl. 3) grants Congress the power to regulate commerce... among the several States. Although the Commerce Clause is phrased as an affirmative grant of power to Congress, it has long been understood to have a negative or dormant aspect that denies states the power to discriminate against or burden the interstate flow of articles of commerce. Fulton Corp. v. Faulkner, 516 U.S. 325, 330 (1996); Oregon Waste Systems, Inc. v. Dept. of Environmental Quality, 511 U.S. 93, 98 (1994). The negative or dormant aspect of the Commerce Clause prohibits economic protectionism designed to benefit in-state economic interests by burdening out-of-state competitors. Fulton Corp., 516 U.S. at 330. In May of this year, the United States Supreme Court revisited the Commerce Clause and succinctly summarized the fundamental indispensability of that provision to our nation s economy: By prohibiting States from discriminating against or imposing excessive burdens on interstate commerce without congressional approval, it strikes at one of the chief evils that led to the adoption of the Constitution, namely, state tariffs and other laws that burdened interstate commerce. Comptroller of Treasury of Maryland v. Wynne, U.S., 135 S. Ct. 1787, 1794, {JX } 12

21 191 L. Ed. 2d 813 (2015). The Court explained that the dormant Commerce Clause prohibits State discrimination between transactions on the basis of some interstate element. Id. (internal quotation omitted). Specifically, a state may not tax a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the State.[n]or may a State impose a tax which discriminates against interstate commerce either by providing a direct commercial advantage to local business, or by subjecting interstate commerce to the burden of multiple taxation. Id. (internal quotation omitted). To determine whether a tax discriminates against interstate commerce, the United States Supreme Court developed a four-part test. In Complete Auto Transit, a case arising in Mississippi, the Court articulated the four-part test a state tax must satisfy to be sustained against a Commerce Clause challenge: (1) the tax must be applied to an activity with a substantial nexus with the taxing state; (2) the tax must be fairly apportioned; (3) the tax must not discriminate against interstate commerce; and (4) the tax must be fairly related to the services provided by the state. Failure to meet any one of the four prongs of the Complete Auto Transit test will render the tax provision invalid. Tennessee Gas Pipeline Co. v. Marx, 594 So. 2d 615, 617 (Miss. 1992). This Court has consistently applied this four-prong test in constitutional challenges to Mississippi tax statutes. See, e.g., Commonwealth Brands, 110 So. 3d at 758; Mississippi State Tax Comm n v. Murphy Oil USA, Inc., 933 So. 2d 285, 293 (Miss. 2006); Thomas Truck Lease, Inc. v. Lee County ex rel. Mitchell, 768 So. 2d 870, 874 (Miss. 2000); Tennessee Gas Pipeline, 594 So. 2d at 617; Weeks Dredging & Contracting, Inc. v. Mississippi State Department, 521 So. 2d 884, 889 (Miss. 1988); Marx v. Truck Renting and Leasing Association, Inc., 520 So. 2d 1333, 1342 (Miss. 1987). The limitation within Section (4)(i) is facially discriminatory and fails the internal consistency test. As such, it violates both the second and third prongs of {JX } 13

22 Complete Auto Transit, as it is not fairly apportioned and discriminates against interstate commerce. IV. The Department Mischaracterizes the Scope of Complete Auto Transit and the Very Nature of Section (4)(i) The Department grossly mischaracterizes both the scope of Complete Auto Transit and the very nature of Section (4)(i). The Department is simply incorrect in claiming that a Complete Auto analysis addresses when a tax, not a deduction, is constitutional. Department s Brief, n.5. This assertion is central to the Department s attempt to avoid the intense constitutional scrutiny of Section (4)(i) mandated by the United States Supreme Court and the Commerce Clause. Certainly many of the cases applying Complete Auto Transit challenge tax imposition statutes, especially those involving claims of lack of nexus, discriminatory tax rates, composition of an apportionment formula, or attempted taxation of nonunitary income. In no way, however, is Complete Auto Transit limited in application to these narrow categories of state tax issues. The gross inaccuracy of the Department s claim is easily demonstrated through a brief survey of the numerous Untied States Supreme Court decisions applying Complete Auto Transit to invalidate a wide range of state tax credits, deductions and exemptions. See Wynne, 135 S. Ct (applying Complete Auto Transit to invalidate a Maryland income tax statute that unconstitutionally prohibited the application of credits against local income taxes); Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564 (1997) (applying the case to invalidate a Maine ad valorem tax exemption that unconstitutionally restricted the exemption based on the residency of those served by a particular charity); Fulton Corp., 516 U.S. 325 (applying the case to invalidate a North Carolina intangibles tax deduction based on the extent of the in-state activity of the company issuing the stock upon which the tax was levied); Armco, 467 U.S. 638 (applying the case to invalidate a West Virginia gross receipts tax based on an {JX } 14

23 unconstitutionally narrow exemption limited only to local manufacturers); Maryland v. Louisiana, 451 U.S. 725 (1981) (applying the case to invalidate Louisiana s first-use tax on natural gas based in part on a discriminatory pattern of credits and exemptions). Clearly, numerous foundational United States Supreme Court decisions dispel any notion that Complete Auto Transit applies only to taxes rather than deductions, exclusions, exemptions, credits and the like. Additionally, the Department s assertion that Section (4)(i) is an income tax deduction is fundamentally incorrect. Department s Brief, n.5. Section (4) expressly excludes each item enumerated in that subsection from the statutory definition of gross income and, therefore, none of those items ever enter the scope of Mississippi s taxing authority. Section (1) provides in relevant part the following general definition of gross income: For the purposes of this article, except as otherwise provided, the term gross income means and includes the income of a taxpayer derived from salaries, wages, fees or compensation for service, of whatever kind and in whatever form paid, including income from governmental agencies and subdivisions thereof; or from professions, vocations, trades, businesses, commerce or sales, or renting or dealing in property, or reacquired property; also from annuities, interest, rents, dividends, securities, insurance premiums, reinsurance premiums, considerations for supplemental insurance contracts, or the transaction of any business carried on for gain or profit, or gains, or profits, and income derived from any source whatever and in whatever form paid. (Emphasis added). Section (4) then qualifies and limits the scope of that general definition, as anticipated by the phrase except as otherwise provided, by expressly stating [t]he words gross income do not include the following items of income which shall be exempt from taxation under this article. (Emphasis added). Included below that introductory phrase are over thirty specifically enumerated income items that never enter a taxpayer s gross income. By contrast, Section sets forth tax deductions and states [i]n computing {JX } 15

24 taxable income, there shall be allowed as deductions the subsequent list of expenses which are removed from gross income. The difference between items identified under Section and those under Section (4) are that the former already will have entered gross income and are subsequently removed via a statutory deduction. Section (4)(i), however, specifically excludes items identified in that subsection from taxation, as they never enter a taxpayer s gross income in the first place. Those items, which include dividends encompassed by Section (4)(i), are entirely beyond the Department s authority to tax. Coincidentally, this Court recently recognized and explained the difference between a tax exclusion and an exemption or deduction, specifically noting that [w]hile this Court has never explicitly found a distinction between an exemption and an exclusion, our caselaw makes it abundantly clear that Mississippi has long recognized such a distinction. Castigliola, 162 So. 3d at 799. Interestingly, the Department makes absolutely no mention of this definitive decision when asserting Section (4)(i) is a deduction rather than an exclusion. In Castigliola, this Court recognized that the casual-sale exception within the sales tax statutes was an exclusion and not an exemption or deduction because the transactions at issue never came within the statutory scope of gross proceeds of the retail sales of the business upon which the tax was imposed. Id. at Neither the term exemption nor exclusion was used in the relevant statutes, and the Court acknowledged that the phrases were often used interchangeably both by the courts and the Legislature. Id. at 799, n.5. Nonetheless, this Court confirmed the two are distinguishable, and clearly recognized the provision at issue as an exclusion because those particular transactions never entered the realm of the retail sales assessed under Section (1). Id. Similarly, Section (4)(i) unambiguously omits dividends from Mississippi s taxing power by providing an exclusion from gross income. In construing a tax exclusion statute {JX } 16

25 such as Section (4)(i), all doubts must be resolved in favor of the taxpayer. Castigliola, 162 So. 3d at 799 (internal citations omitted). Such statutes are to be strictly construed against the taxing power and the power cannot be implied. Id. The courts may not interpret a statute to include within gross income items the Legislature expressly chose to exclude, and they must interpret an unconstitutionally narrow exclusion against taxation, even if it results in an exclusion which is broader than originally contemplated. As a result, the Court should reject the Department s argument that the exclusion at issue is a deduction. More importantly, however, the Court should see the Department s argument for what it is: a red herring. Regardless of whether an exclusion or deduction is at issue, the Complete Auto Transit test applies and invalidates the limitation. V. The Limitation Within Section (4)(i) Fails the Internal Consistency Test and Thereby Violates the Second and Third Prongs of Complete Auto Transit The Department correctly sets forth the nature of the internal consistency test in its Brief, but curiously fails altogether to apply or even analyze that test. Even more confounding, the Department completely fails to mention the United States Supreme Court s opinion issued just this May in which the Court invalidated a key Maryland tax credit limitation based entirely upon an application of the internal consistency test. Wynne, 135 S. Ct. at Had the Department properly analyzed and discussed the Wynne decision and its application of this test, as well as the numerous other federal and state court decisions on point, it could not avoid admitting that Mississippi s tax scheme fails this well-established constitutional standard. Such failure violates the second prong of Complete Auto Transit on the grounds that the tax system is not fairly apportioned, and also constitutes a discriminatory tax scheme, thereby violating the third prong of Complete Auto Transit. {JX } 17

26 A. Defining the Internal Consistency Test The internal consistency test is central to whether a state tax is fairly apportioned under the four-part test of Complete Auto Transit, which mandates that interstate commerce must not bear a burden that intrastate commerce does not (such as multiple taxation). Commonwealth Brands, 110 So. 3d at 759; see also Oklahoma Tax Comm n v. Jefferson Lines, Inc., 514 U.S. 175, , 185 (1995); Thomas Truck Lease, 768 So. 2d at 876. Internal consistency is preserved only when the imposition of a tax identical to the one in question by every other state would add no burden to interstate commerce that intrastate commerce would not also bear. Commonwealth Brands, 110 So. 3d at 758, quoting Jefferson Lines, 514 U.S. at 185. As recognized by this Court on multiple occasions, [t]o be internally consistent, a tax must be structured so that if every state were to impose an identical tax, no multiple taxation would result. Id., quoting Thomas Truck Lease, 768 So. 2d at 876. A state tax scheme failing the internal consistency test is not fairly apportioned and discriminates against interstate commerce, thereby running afoul of the Commerce Clause. The United States Supreme Court reaffirmed the scope and importance of the internal consistency test in Wynne when it invalidated Maryland s tax scheme which denied its residents a credit against Maryland s local income taxes for taxes paid on that same income to other states. Wynne, 135 S. Ct. at The effect of Maryland s scheme was that the income earned by Maryland residents outside the state was taxed twice, once by the states in which the taxpayer earned its income, and again by Maryland s local taxing jurisdictions. Id. This scheme created a powerful incentive for taxpayers to opt for intrastate rather than interstate economic activity and was tantamount to a tariff on out-of-state business activities. Id. In the recent Mississippi case of Commonwealth Brands, this Court held that a tax imposed on cigarettes of certain manufacturers distributed within Mississippi for sale outside {JX } 18

27 Mississippi violated the Commerce Clause and was thus unconstitutional because the tax was internally inconsistent and led to multiple taxation, resulting in a burden on interstate commerce that intrastate commerce would not also bear. 110 So. 3d at A cigarette manufacturer and two cigarette distributors sued the Department, claiming in part that the imposition of a specific tax on products sold, purchased, or distributed in Mississippi, but ultimately sold to customers or users outside Mississippi, violated the Commerce Clause. The manufacturer and distributors sought a declaration that the imposition of the tax on cigarettes for sale outside Mississippi was unconstitutional, and sought an injunction to prevent the Department from collecting the tax from them for cigarettes distributed in Mississippi for sale outside the state. This Court applied the four-pronged Complete Auto Transit test and found that the statute was internally inconsistent and resulted in an undue burden on interstate commerce by creating multiple taxation. Id. at As a result, this Court held that the statute violated the Commerce Clause and was, therefore, unconstitutional: Thus, if another state adopted a law identical to the NSM law, two fees would be imposed on the same cigarettes. Stated simply, this interstate application involves two fees on the same cigarettes. In contrast, if the cigarettes acquired by the Mississippi distributor were sold intrastate, they would be subject to only one fee under the Mississippi NSM law. Although each state would impose its fee on a separate transaction, cigarettes sold in interstate commerce would bear a second fee that those sold in intrastate commerce would not. Id. at Thus, this Court correctly recognized that if another state enacted a statute identical to the challenged law, interstate commerce would bear a burden that purely intrastate commerce would not also bear multiple fees on the same cigarettes. The limitation within Section (4)(i) and the offensive tobacco fee in Commonwealth Brands are fundamentally indistinguishable: they are both specifically designed to impose a second level of state taxation on interstate transactions that comparable intrastate transactions do not suffer. If every state {JX } 19

28 were to adopt a law identical to Section (4)(i), each state in which the parent corporation operates would tax the earnings of every Non-Nexus Subsidiary a second time, a risk not faced by the Nexus Subsidiaries that maintained an intrastate presence in those same jurisdictions. B. Applying the Internal Consistency Test to Section (4)(i) A simple mathematical example based on a basic parent/subsidiary corporate structure demonstrates how Section (4)(i) fails the internal consistency test. Assume the Non- Nexus Subsidiary does business in five states other than Mississippi, and the Nexus Subsidiary does business in the same five states plus Mississippi. Assume further that each subsidiary apportions 100% of its income to the states in which it operates, and each of the other states has the exact same 5% corporate income tax rate as Mississippi. Mississippi will tax an apportioned share of the Nexus Subsidiary s earnings at the operating subsidiary level (as will each of the other states where the subsidiary operates), but when the subsidiary distributes its net earnings to the parent as a dividend, Mississippi does not tax the parent s receipt of those earnings because (and only because) the Nexus Subsidiary did business in the state. (R. 2: , R.E ). Mississippi will, however, tax the parent s receipt of the Non-Nexus Dividend based on the Non- Nexus Subsidiary s lack of a Mississippi presence. Id. Non-Nexus Subsidiary Nexus Subsidiary Subsidiary s operating income $1,000 $1,000 Average multistate tax rate 5% 5% State taxes on operating income $50 $50 Dividend to Parent (net of taxes above) $950 $950 Parent s Mississippi apportionment ratio 20% 20% Parent s Mississippi taxable income $190 $0 Mississippi tax rate 5% 5% Mississippi tax imposed on dividend $9.50 $0 Total state taxes on subsidiary earnings $59.50 $50.00 {JX } 20