UNITARY BUSINESSES are exposed potentially to more taxes at the state level. An appeals court decision in July in Massachusetts sheds light on how to avoid unitary treatment.

Massachusetts wanted to collect $1.2 million in corporate excise taxes from W.R. Grace & Co. on its capital gains from the sale of interests in the Herman’s sporting goods chain, El Torito restaurants, and other businesses. Grace is a Connecticut corporation, but it does business in all 50 states. Massachusetts taxes any company doing business in the state on its income from Massachusetts sources. A portion of the company’s entire income is allocated to Massachusetts in the same ratio as its sales, employees and property in the state.

The appellate tax board said the capital gains had too little connection to Massachusetts for the state to be allowed under the US constitution to tax them. However, such a connection would be present if the subsidiaries that Grace sold were merely components in a larger, “unitary” W.R. Grace & Co. business. In that case, the capital gains would be taken into account as income of the unitary business in applying the three-factor allocation formula.

On appeal to a Massachusetts appeals court, the court considered whether Grace and the subsidiaries were a unitary business. It said no for the Herman’s and El Torito chains, but sent the case back to the appellate tax board to look more closely at the facts surrounding other subsidiaries. The court’s opinion runs through a list of factors that are key to avoiding unitary treatment. The case is W.R. Grace & Co. v. Commissioner of Revenue.

Keith Martin