High Court Strikes Down State Corporate Tax Law

The U.S. Supreme Court on Tuesday struck down a California corporate tax law dating to 1936, declaring that the rule imposed unfair levies on companies headquartered in other states.

California officials estimate that the ruling will force the state to pay as much as $95 million overall in refunds for past years. They said the high court’s decision also will reduce future corporate income tax revenue by $13 million to $15 million annually.

Those sums reflect only a tiny share of the more than $5 billion a year that California receives in corporate taxes. Still, about 800 companies based in other states are expected to benefit from reduced taxes, and a roughly equal number of businesses headquartered in California faces higher levies.

“There are winners and losers,” said Benjamin F. Miller, a lawyer with the state Franchise Tax Board.

The unanimous high court decision stems from a case brought by the Hunt-Wesson unit of Omaha-based ConAgra Inc., which is expected to receive refunds and interest totaling $3 million to $4 million.

Hunt-Wesson argued that California’s law had the indirect effect of unconstitutionally taxing the company for out-of-state earnings. It said California did this by unfairly limiting the interest expense deductions that multi-state companies based outside of California could take.

California defended its so-called interest offset provision as a way to prevent companies from improperly avoiding taxes by borrowing money for out-of-state purposes and then claiming the expense as a deduction in California.

But Justice Stephen Breyer, writing for the court, said the approach in California law “pushes this concept past reasonable bounds.”

Charles J. Moll III, a lawyer for Fullerton-based Hunt-Wesson, said the decision “is a reaffirmation by the U.S. Supreme Court of the principle that a state may not tax income earned beyond its borders either directly or indirectly.”

Lawyers said the ruling’s financial impact on California would be limited because state officials already have other means of allocating deductions.