Justice Dept. Supports State on Tax Challenge

The Justice Department urged the Supreme Court on Thursday to dismiss a pending challenge to California’s so-called unitary tax on multinational firms, a move that could spare the state from paying as much as $4 billion in refunds.

The brief was delivered to the court one day after Gov. Pete Wilson signed legislation that repealed restrictions that had forced most foreign companies operating in California to use the disputed method for calculating their taxes.

Although the high court need not follow the government’s advice, the justices are likely to heed the recommendation in this case.

The high court typically hears only appeals that raise broad legal issues. Now that the unitary taxing method has been ended, the appeal filed by Barclays Bank of San Francisco “lacks substantial recurring importance” and “should be denied,” U.S. Solicitor Gen. Drew S. Days III told the court.

For the last year, State Board of Equalization Chairman Brad Sherman has been lobbying federal officials, including President Clinton, to get the Administration’s backing for the state’s position. Sherman said he was delighted with the brief filed Thursday.

For months, the White House had been put in a difficult position by a pending appeal filed by the British-owned Barclays Bank. The bank sought an order declaring California’s tax unconstitutional and ordering refunds dating to 1977.

During his campaign, Clinton promised to take a “pro-California” stand in such disputes and he questioned whether foreign-owned firms were paying their fair share of taxes in the United States.

However, officials in Britain, France and other key trading nations had threatened to retaliate against U.S. firms operating abroad if California’s unitary tax were permitted to continue.

Although most states treat a foreign-owned firm operating within its borders as a separate business and tax only its profits earned within the state, California charged a hefty fee and required intrusive audits of any company choosing this method.

The only alternative for multinational firms was to subject themselves to taxation of a percentage of their worldwide profits. This method, state officials said, prevented foreign firms from using accounting tricks to hide profits they had earned in California.

But European and Asian government officials complained that their firms were paying more than their fair share of taxes in California. During the 1980s, officials in the Ronald Reagan and George Bush administrations took up these complaints and recommended that California’s system be declared an unconstitutional infringement on the federal authority over international relations.