Foreign Companies Hail Court Ruling on Unitary Tax

British-owned Barclays Bank and other multinational corporations doing business in California cheered a state appeals court decision declaring the state’s method of unitary taxation unconstitutional.

California officials immediately vowed to appeal the ruling issued late Monday by a panel of the 3rd District Court of Appeal in Sacramento. State Controller Gray Davis said if the ruling stands, the state could be forced to refund between $303 million and $526 million in taxes paid by the multinationals.

Barclays Bank sued the state in 1984, claiming California’s method of taxing foreign-owned firms is unfair and discourages foreign investment. The U.S. Department of Justice and the British and Canadian governments agreed with Barclays and filed friend of the court briefs.

Under the unitary method, the payroll, sales and property of a foreign-owned company is added up by the state Franchise Tax Board. The portion attributed to California is then calculated and used for income tax purposes. For example, if 10% of a global corporation’s sales, payroll and property are generated or located in California, the state asserts the right to apply its bank and corporation tax to 10% of a company’s worldwide taxable income.

“We consider the ruling a major victory,” said Joanne Garvey, an attorney who represents Barclays at the San Francisco law firm of Heller, Ehrman, White & McAuliffe. “The company is delighted that the court of appeals has confirmed the lower court ruling on a three to nothing vote.”

She said Barclays may be entitled to a refund of up to $20 million, including the original tax and penalties. The bank sold its retail banking operations to Wells Fargo in 1987 but maintains a wholesale banking operation in California.

Garvey argued that the U.S. government, not individual states, should be responsible for matters of foreign trade.

The appeals court panel agreed. Retired Justice Hugh A. Evans wrote that California’s system of unitary taxation violates the foreign commerce clause of the U.S. Constitution because it prevents the federal government “from speaking with one voice” in regulating foreign trade.

Several Japanese-owned companies, including Sony and Kyocera International, have been heavily involved in fighting California’s unitary method of taxation. At one time in the mid-1980s, more than 100 lobbyists representing various business interests were pushing state lawmakers to abolish the tax.

“California is a big place for Sony to do business,” said Koh Shimizu, director of corporate communications for Sony in New York. “We have been encouraging California to alter the unitary tax to invite foreign investment.” Shimizu said he does not know how much tax money Sony would recover if the ruling stands.

About 3,000 of Sony’s 10,000 U.S. employees are based in California. He said more than 2,000 employees make color television sets, picture tubes, floppy disk drives for computers, computer workstations and computer monitors at a factory in San Diego. Sony also has operations in Cypress and San Jose. Shimizu said Sony opened the San Diego plant in 1972 and has been expanding operations in the state ever since.

“A number of companies, led by Kyocera and Sony, have been trying desperately to get the state tax authorities and legislators to see our point of view on the unitary tax,” said Bill Everitt, vice president of communications for Kyocera International in San Diego.

Kyocera, which makes ceramic packages for the semiconductor industry, is a subsidiary of Kyocera Corp., a $3-billion Japanese firm. It has 1,300 employees in California, with offices in San Diego, Laguna Hills and San Jose.

About five years ago, the California Legislature modified the tax system to permit foreign-owned firms to be taxed as if they were California companies. However, extra administrative fees are imposed on companies that elect to pay taxes under what is known as the “water’s edge” plan--a program that treats foreign companies as if they were based in the state.

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