CALIFORNIA will have to change the way it taxes dividends that corporations receive from other companies

CALIFORNIA will have to change the way it taxes dividends that corporations receive from other companies

June 01, 2003
CALIFORNIA will have to change the way it taxes dividends that corporations receive from other companies. So might other states.

California collects franchise taxes from corporations that do business in the state. Farmer Bros. Co. makes and sells coffee and coffee-related products. The company is based in California. The income it reported for franchise tax purposes included dividends it received from companies in other states in which it has made investments.

California allows a “dividends-received deduction” that has the effect of excluding part of the dividends from California taxes. However, the part excluded depends on the extent to which the out-of-state company paying the dividend was itself subject to California taxes. There is a sliding scale.

A California appeals court declared in late May that the arrangement is unconstitutional because it tends to discourage interstate commerce in violation of the “commerce clause” of the US constitution. The case is Farmer Bros. Co. v. Franchise Tax Board.

The case is a reminder to states about the perils of writing tax statutes so as to reward doing business inside the state.

WYOMING cannot collect a tax on coal shipments — at least not from railroads.

A federal district court enjoined the state in late April from collecting a tax of .01¢ per ton of coal shipped in the state from three railroads that had challenged the tax. The tax went into effect in January 2001. The three railroads together carried 99.6% of all coal shipped in the state in 2001 and faced a tax bill of $5.7 million for that year. The court said the tax ran afoul of a federal statute — called the Railroad Revitalization and Regulatory Reform Act of 1976 — that bars states from singling out railroads for special taxes that are not generally applicable to other businesses.

The court said it did not matter in this case that the tax also applied to trucking companies that carry coal. Their share of the market is tiny. Total taxes owed by all the trucking companies combined in 2001 came to only $18,622. Therefore, this is a tax aimed in practice at the railroads. The case is Burlington Northern et al. v. Atwood.

The poor trucking companies: the Wyoming attorney general said in May that he sees no reason not to continue collecting the tax from truckers. The state legislature will consider repealing the tax when it reconvenes in February 2004.

WEST VIRGINIA may have to increase a tax on coal mined in the state, a state official suggested in late April. It should know for sure by July.

West Virginia collects a tax of 14¢ a ton currently to cover the cost of cleaning up abandoned surface mining sites. The money goes into a special reclamation fund. The rate is scheduled to drop to 7¢ a ton in April 2005. Charles Miller, who oversees the fund for the state Department of Environmental Protection, said new projections will probably show the fund has a significant shortfall.

Keith Martin