U.S. Urges High Court to Back State in Multinational Tax Case

Siding with California in a tax case in which $4 billion is at stake, lawyers for the Clinton Administration on Wednesday urged the Supreme Court to uphold the state’s use of the so-called “unitary tax” on multinational corporations.

The legal brief, filed in the pending case of Barclays Bank vs. California, 92-1384, redeems Clinton’s campaign pledge to take a “pro-California” stand in the huge tax dispute, which involves the nation’s foreign trading partners.

In an earlier phase of the case, officials of the Ronald Reagan and George Bush administrations had contended that California’s distinct method of taxation disrupted the nation’s foreign relations and should be declared unconstitutional.

If the high court were to adopt that view, the state could be forced to pay refunds or forgo disputed tax assessments that amount to $4 billion.

But the Administration brief argues that neither Congress nor the White House put California on notice during the 1970s and 1980s that its taxing system was disruptive.

The state should not be “unjustly held liable for refunds of tax that violated no federal policy” at the time, the brief says. Congress could have required all states to adopt an identical taxing system, but it did not do so, the brief noted.

Unlike most states and nations, which treat the local operations of a multinational firm as though they are separate businesses, California treated multinationals as a single business and taxed a portion of the whole enterprise.

Corporate tax lawyers complain this unitary method permits California to tax profits that were not earned within the state.

But state lawyers counter that the simple accounting system combats international tax cheating. Some foreign firms have allegedly shifted their costs so as to claim they earn no profits in California.

Nonetheless, state lawmakers bowed to pressure from international business last year and essentially repealed the unitary tax. But billions of dollars in past collection remain in dispute.

The high court is expected to hear arguments in the case in late March and issue a ruling by summer.