Facts
- Iowa imposed a corporate income tax on multistate businesses and apportioned income using a single-factor formula based solely on the ratio of in-state sales to total sales.
- Moorman Manufacturing Company, an Illinois corporation, manufactured animal feed in Illinois and sold about 20% of its output to Iowa customers through Iowa-based sales personnel and warehouses.
- For years, Iowa tax authorities allowed Moorman to use a three-factor apportionment method (property, payroll, and sales), yielding a lower Iowa tax than the statute’s sales-only formula.
- Iowa later required use of the statutory single-factor method; Moorman continued to file using a three-factor method.
- Iowa assessed a deficiency reflecting the difference between tax due under the statutory sales-only formula and Moorman’s three-factor computation.
- Moorman challenged the statute under the Due Process Clause and the Commerce Clause, arguing the formula attributed to Iowa income earned in Illinois and risked multiple taxation when combined with Illinois’s three-factor approach.
Issues
- Whether Iowa’s single-factor sales apportionment formula violated due process by attributing to Iowa income not fairly related to Moorman’s in-state activities.
- Whether Iowa’s formula violated the Commerce Clause by causing unconstitutional multiple taxation or otherwise unduly burdening interstate commerce, particularly because Illinois used a different apportionment formula.
Decision
- The Supreme Court affirmed the Iowa Supreme Court in a 6–3 decision.
- The Court held Iowa’s single-factor sales apportionment did not violate the Due Process Clause.
- The Court held the formula did not violate the Commerce Clause and that, absent congressional action, the Commerce Clause does not require Iowa to use Illinois’s three-factor formula.
- The Court concluded Moorman failed to prove the Iowa formula produced income attribution “out of all reasonable proportion” to Iowa business or resulted in a “grossly distorted” outcome.
Legal Principles
- A state may apportion the income of a multistate, unitary business by formula as a rough approximation of income related to in-state activity.
- An apportionment formula is unconstitutional only if the taxpayer proves by clear and cogent evidence that the income attributed to the state is out of all reasonable proportion to in-state business or yields a grossly distorted result.
- Speculative assertions about where profits were “earned” are insufficient to invalidate a formula; the taxpayer must make a concrete evidentiary showing.
- Potential overlap from different state apportionment formulas does not, by itself, establish a Commerce Clause violation, and the Commerce Clause does not require nationwide uniformity in state apportionment methods without implementing federal legislation.
Conclusion
The Court upheld Iowa’s sales-only apportionment for corporate income tax, ruling that constitutional challenges to a state’s chosen formula require a strong factual showing of gross distortion and that the Commerce Clause does not mandate uniform state apportionment formulas absent congressional action.