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Justices Rebuff Arguments Against State Unitary Tax : Judiciary: U.S. Supreme Court members' responses indicate that California may not have to refund $4 billion to multinational corporations.


WASHINGTON — In a session that bodes well for California's treasury, Supreme Court justices Monday rebuffed arguments that they should restrain the state's use of the unitary tax on multinational corporations.

Instead, the justices, in comments from the bench, said that Congress--not the courts--has the authority to impose limits on taxing policy.

"We are not the final arbiter of this. The Constitution gave Congress the power to regulate commerce," said Justice Ruth Bader Ginsburg. "I don't know any other country that would put this kind of question to a court."

Ginsburg's remarks were in reply to arguments by an attorney for British-owned Barclays Bank of San Francisco, who urged the court to declare the state's unitary tax unconstitutional. If the justices were to follow that advice, the state would be forced to repay $4 billion in taxes.

But that possibility appeared remote, given the response to Monday's arguments.

For nearly two decades, California has ruffled the feathers of foreign firms by taxing part of their worldwide income. In contrast, most other states treat foreign firms as distinct businesses within their borders.

The foreign firms have complained that the California approach allows the state to tax profits earned outside California. During the 1980s, officials of the Ronald Reagan Administration sided with the foreign firms, saying that the state's taxing method interfered with U.S. trade relations.

Citing those comments, lawyers for the multinational firms built a legal challenge to California's tax and demanded refunds dating to the late 1970s. They argued that the Constitution requires all states, as well as the U.S. Treasury, to "speak with one voice" in their dealings with foreign nations.

But three recent developments have undercut their case.

First, Congress stopped short of passing legislation outlawing a state's use of the unitary tax. As the justices repeatedly noted during Monday's arguments, the Constitution says that "Congress shall have the power . . . to regulate commerce with foreign nations."

Second, California lawmakers last year essentially repealed future use of the unitary method. Thus, critics no longer can claim that the state's taxing approach is a continuing thorn in the nation's trade relations.

And third, the Clinton Administration, breaking with its predecessors, took the state's side in final stages of the litigation.

Tip-toeing around the controversy, U.S. Solicitor Gen. Drew Days told the justices Monday that the executive branch prefers that states treat multinational businesses within their borders as separate entities for taxing purposes but has no firm policy.

During the 90-minute argument, Chief Justice William H. Rehnquist and Justices David H. Souter, Antonin Scalia and Anthony M. Kennedy joined Ginsburg in disputing the assertion that the court should restrain California because neither Congress nor the Treasury Department has done so.

A written ruling in the Barclay's case and a parallel case (Barclay's Bank vs. Franchise Tax Board, 92-1384, and Colgate-Palmolive vs. Franchise Tax Board, 92-1389) is due by July.

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