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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Tesoro Corporation and Subsidiaries v. State, Dept. of Revenue (10/25/2013) sp-6838

Tesoro Corporation and Subsidiaries v. State, Dept. of Revenue (10/25/2013) sp-6838, 312 P3d 830

         Notice:  This opinion is subject to correction before publication in the PACIFIC  REPORTER .  

         Readers are requested to bring errors to the attention of the Clerk of the Appellate Courts,  

         303  K  Street, Anchorage, Alaska  99501, phone   (907) 264-0608, fax   (907) 264-0878, email  

         corrections@appellate.courts.state.ak.us.  



                   THE SUPREME COURT OF THE STATE OF ALASKA  



TESORO CORPORATION                                    )  

AND SUBSIDIARIES,                                     )        Supreme Court No. S-14326  

                                                      ) 

                      Appellants,                     )        Superior Court No. 3AN-09-08897 CI  

                                                      )  

         v.                                           )        O P I N I O N  

                                                      )  

STATE OF ALASKA,                                      )       No. 6838 - October 25, 2013  

DEPARTMENT OF REVENUE,                                )  

                                                      )
 

                     Appellee.                        )
  

                                                      )
  



                  Appeal from the Superior Court of the State of Alaska, Third  

                                                                                 

                  Judicial District, Anchorage, Fred Torrisi, Judge.  



                  Appearances:           Mark      Wilkerson,        Wilkerson        Hozubin,  

                  Anchorage, Gregory A. Castanias, Jones Day, Washington,  

                  D.C., and David E. Cowling and Roy T. Atwood, Jones Day,  

                  Dallas,  Texas,  for  Appellants.  R .  Scott  Taylor,  Senior  

                                                                     

                  Assistant Attorney General, Anchorage, Deborah J. Stojak,  

                                                                                       

                  Assistant   Attorney   General,   and   Michael   C.   Geraghty,  

                  Attorney General, Juneau, and Louisiana W. Cutler, Jennifer  

                                                       

                  M.  Coughlin,  and  Serena  S.  Green,  K&L  Gates  LLP,  

                  Anchorage, for Appellee.  



                  Before:      Fabe,   Chief   Justice,   Carpeneti,   Winfree,   and  

                  Stowers, Justices, and Eastaugh, Senior Justice.*  

                                                                                      



                  EASTAUGH, Senior Justice.  



         *        Sitting  by  assignment  made  under  article  IV,  section  11  of  the  Alaska  



Constitution and Alaska Administrative Rule 23(a).  


----------------------- Page 2-----------------------

I.        INTRODUCTION  



                   Tesoro  Corporation  challenges  income  taxes  assessed  against  it  by  the  



Alaska Department of Revenue (DOR) for 1994 through 1998.  DOR calculated Tesoro's  



Alaska income by applying a three-factor apportionment formula to Tesoro's worldwide  



                                    

income,  including  that  of  its  non-Alaskan  subsidiaries.    Tesoro  challenged  DOR's  



                                    

apportionment in a trial before an administrative law judge, who ruled that Tesoro was  



                                           

a unitary business that could be subject to formula apportionment, and that DOR could  



                             

permissibly  assess  penalties  against  Tesoro.    Tesoro  appealed  to  the  superior  court,  



which affirmed.  



                               

                   Tesoro argues here that only the income of its Alaska-based subsidiaries  



                                                                                             

should have been subject to taxation in Alaska because Alaska's tax scheme violates the  



Due  Process  and  Interstate  Commerce  Clauses  of  the  United  States  Constitution.  



Because   Tesoro's   business   was   unitary,   we   reject   Tesoro's   challenge   to   the  



constitutionality  of  taxing  all  of  its  income  under  formula  apportionment.    Because  



                                                         

Tesoro lacks standing to challenge the formula's constitutionality, we do not reach the  



                                                                  

internal consistency issue Tesoro raises.  We also conclude that applying the formula to  



                                                                                          

Tesoro satisfied the statutory requirement of reasonableness.  Finally, we conclude that  



                                                                       

DOR permissibly imposed penalties on Tesoro.  We therefore affirm the superior court  



decision that affirmed the administrative law judge's decision and order.  



                        

II.       FACTS AND PROCEEDINGS  



          A.       Tesoro's Business Activity  



                   At   relevant   times,   Tesoro   Corporation   was   a   petroleum   company  

headquartered in San Antonio, Texas.1  Tesoro had 33 subsidiary corporations that were  



          1        Our description of the facts is based on the facts explicitly found by the  

                                                                                                                     

administrative law judge and the evidence the administrative law judge found persuasive.  



                                                             -2-                                                         6838  


----------------------- Page 3-----------------------

organized  into  five  business  segments:    (1)  the  Exploration  and  Production  (E&P)  



segment based in Texas and Bolivia; (2) the Retail and Marketing (R&M) segment based  



               2                                                                                                   3 

in Alaska;  (3) the Marine Services segment based in Louisiana and Texas;  (4) the 



Corporate segment based in Texas; and (5) the Finance segment based in Texas.  



                                                

                    Tesoro's board of directors had an active hand in shaping the financial,  



operational, and managerial decisions for Tesoro's subsidiaries.  During the relevant  



                                                                                  

period, the board met almost monthly to discuss and approve various aspects of the  



subsidiaries'  operations.    Furthermore,  Tesoro's  Corporate  and  Finance  segments  



                                                                                                       

provided a number of administrative and financial services that were shared across all  



subsidiaries.  



                                                             

                    Two developments during  the relevant tax years caused the companies  



                       

within E&P to realize profits greater than those realized by the subsidiaries within R&M.  



In 1995 Tesoro sold part of its interest in a valuable natural gas field.  And in 1996  



                                                                                                     

Tesoro prevailed on a breach of contract claim and later that year sold its remaining  



interest in the same contract.  Those events brought E&P nearly $200 million in revenue.  



Tesoro's appeal here effectively tries to shield the profits related to those events from  



taxation in Alaska.  



          2         Although E&P and R&M are names the litigants and prior adjudicators     



have applied to Tesoro's operational segments, this semantic choice should not be read  

to suggest that the Tesoro subsidiaries within each segment were necessarily somehow  

                                                          

distinct from the Tesoro parent company or each other.  All subsidiaries within each  

segment bore the name "Tesoro."  For example, the R&M segment included the Tesoro  

                                                                                                   

Northshore Company and the Tesoro Alaska Petroleum Company.  



          3         The Marine Services segment was deemed "relatively insignificant" by the  



administrative law judge.  Tesoro asserts that the Marine Services operation is not at  

                              

issue here, and nothing in DOR's briefing or the orders below suggests otherwise.  



                                                              -3-                                                       6838
  


----------------------- Page 4-----------------------

          B.       Tesoro's Tax History In Alaska  



                                                                                          

                   In 1959 Alaska adopted the Uniform Division of Income for Tax Purposes  



                       4  

Act (UDITPA).   UDITPA was drafted and approved by the National Conference of  



                                                                                                                    

Commissioners on Uniform State Laws in 1957 in an attempt to bring uniformity to state  



              5  

tax codes.   In 1970 Alaska adopted the Multistate Tax Compact, which is a restatement  



                                                          6  

                                                             The Multistate Tax Compact is codified at  

of UDITPA with  some minor changes. 



AS 43.19.010.  Per AS 43.19.010, article IV, section 9, the portion of a business's total  

                                                                                 



income apportioned to Alaska is determined by "multiplying the income by a fraction,  



the numerator of which is the property factor plus the payroll factor plus the sales factor,  



                                                                                                                     

and  the  denominator  of  which  is  three."  The  property  factor  is  the  fraction  of  the  



                                                                                                             

taxpayer's  total  property  and  the  property  attributable  to  the  taxpayer's  business  in  



                                                                    

Alaska; similarly, the sales and payroll factors are fractions of the taxpayer's respective  



                                                                                                       7  

total sales and payroll attributable to the taxpayer's business in Alaska.   



                   Alaska Statute 43.19.010, article IV, section 18 permits DOR to adjust a  



taxpayer's  tax  burden  if  the  statutorily  mandated  apportionment  does  not  "fairly  



represent the extent of the taxpayer's business activity in this state."  Subsection 18(a)  

                                                                     



allows DOR to apportion the taxpayer's income based on separate accounting, while  

                                                                         



subsection   18(c)   allows   DOR   to   add   "one   or   more   additional   factors"   to   the  



          4        Ch. 175,  1, SLA 1959.  



          5        Larry D. Scheafer, Annotation,  Construction and application of uniform  



division of income for tax purposes act, 8 A.L.R. 4th 934  2 (1981); see also  1 J 

                                                                                                                   EROME  

R. HELLERSTEIN &  WALTER HELLERSTEIN , STATE TAXATION   8.06[3][b], at 8-70 (3d ed.  

2012).  



          6        Ch. 124,  1, SLA 1970; State, Dep't of Revenue v. Amoco Prod. Co., 676  



P.2d 595, 598 n.3 (Alaska 1984).  



          7        AS 43.19.010, art. IV,  10, 13, 15.  



                                                             -4-                                                      6838
  


----------------------- Page 5-----------------------

                                   8 

apportionment formula.   The statute effectively requires that any remedy DOR enforces   

under section 18 be "reasonable."9  



                                                                        

                    Alaska Statute 43.20.144 modifies AS 43.19.010's apportionment scheme  



                                         

for all taxpayers "engaged in the production of oil or gas . . . in this state or engaged in  

                                                                                  10  Alaska Statute 43.20.144(c)  

                                                                                      

the transportation of oil or gas by pipeline in this state." 



provides three different apportionment formulas for such taxpayers, depending on the  

                                                           



nature of the taxpayer's oil or natural gas business in Alaska.  Under AS 43.20.144(c)(1),  

                                                                                         



a taxpayer that only transports oil or gas in Alaska is subject to a two-factor formula  



based on property and sales.  Under AS 43.20.144(c)(2), a taxpayer that only produces  



                                                              

oil or gas in Alaska is instead subject to a two-factor formula based on property and  



                                                                                                          

extraction.    Finally,  under  AS  43.20.144(c)(3),  a  taxpayer  that  both  transports  and  



                                 

produces oil or gas in Alaska is subject to a three-factor formula based on property, sales,  



and extraction.  



                                                                                                             

                    From the time it began doing business in Alaska in 1969 until 1994, Tesoro  



filed its tax returns as a unitary business.  During this period all of Tesoro's corporate  



income was subject to taxation in Alaska, and the amount actually apportioned to Alaska  



                                                                                                        

was determined by the three-factor property, sales, and payroll formula of AS 43.19.010,  



                                 

article IV, section 9.  In 1995 Tesoro purchased the Kenai Pipeline (KPL), the pipeline  



                                                                                                       

that serviced its Kenai-based refinery.  As a result of this purchase, Tesoro became a  



taxpayer "engaged in the transportation of oil or gas by pipeline" in Alaska, and thus  



became subject to taxation under AS 43.20.144.  



          8         AS 43.19.010, art. IV,  18(a), 18(c).  



          9         AS 43.19.010, art. IV,  18.  



          10        AS 43.20.144(a).  AS 43.20.144 was formerly codified as AS 43.20.072 but  



was renumbered in 2012.  



                                                             -5-                                                        6838
  


----------------------- Page 6-----------------------

                     In its tax return for 1995 Tesoro took the position that KPL was not unitary  

                                                                                                                        



with the remainder of Tesoro's business segments.                                Tesoro thus claimed that only KPL   



was subject to taxation under the two-factor property and sales formula specified by  



                                                             

AS  43.20.144(c)(1),  while  Tesoro's  remaining  business  segments  were  subject  to  



taxation under the three-factor property, sales, and payroll formula specified by AS  



                                                                                 

43.19.010, article IV, section 9.  This was the first time Tesoro had ever asserted in an  



                                                                    

Alaska tax return that its subsidiaries were not unitary with each other.  In its tax returns  



                                                                                                                            

for 1996 and 1997 Tesoro again took the position that KPL was not unitary with the  



remainder of Tesoro's subsidiaries.  And in those returns Tesoro also asserted for the  



                                                              

first time that its Finance segment was not unitary with the remainder of its subsidiaries  



and as such was not subject to taxation in Alaska at all.  



                                                       

                     On October 1, 1998,  DOR completed an audit of Tesoro's tax returns for  



                                                                                                                     

the  years  1994  and  1995  and  rejected  Tesoro's  position  that  KPL  and  the  Finance  



               

segment were not unitary with the remainder of Tesoro's subsidiaries or each other.  



                                                                                

DOR's resulting assessment stated that "Tesoro is one unitary petroleum business" and  



that "the entire group is subject to modified apportionment under AS [43.20.144]."  



DOR accordingly apportioned all of Tesoro's business income under the two-factor  



                                                                              

property and sales formula of AS 43.20.144(c)(1) for nine months of 1995 to account for  



                                                                               

Tesoro's  March  1995  purchase  of  KPL.                            DOR  also  disallowed  the  exemptions  for  



Tesoro's foreign subsidiaries for this same nine-month period.  



                     After receiving this assessment, Tesoro filed its 1998 tax return in which  



                                                                                   

Tesoro again asserted that KPL was not unitary with the remainder of Tesoro's business  



segments.  This return also took the position that the subsidiaries within R&M were not  



                                                                  -6-                                                           6838
  


----------------------- Page 7-----------------------

                                                                                                       11  

unitary with the remainder of Tesoro's subsidiaries, including KPL.    Thus, this 1998  



                                                                     

tax return treated only the R&M subsidiaries and KPL as subject to taxation in Alaska:  



                                                                  

KPL under AS 43.20.144(c), and the R&M subsidiaries under AS 43.19.010, article IV,  



                                                                                                           

section  9.    In  response,  DOR  conducted  a  second  audit  assessment  of  Tesoro's  tax  



                                                                                 

filings, this time for the years 1996, 1997, and 1998.  In the resulting assessment, DOR  



                            

rejected Tesoro's theory concerning the unitariness of Tesoro's business and reasserted  



that all of Tesoro's businesses were a single unitary group subject to AS 43.20.144.  



                    But  during  the  interval  between  DOR's  first  audit  and  its  second,  the  



                                                                                        

Attorney General of Alaska issued an opinion calling into question the constitutionality  



of AS 43.20.144(c) as applied to businesses that produce oil or gas in state but transport  

                    12  In response, DOR issued an advisory letter on November 19, 1999 to all  

it out of state.                                                                              



oil and gas taxpayers in Alaska; the letter stated that DOR would exercise its authority  

            



under AS 43.19.010, article IV, subsection 18(c) to fashion a remedy to the constitutional  

                                                                 



infirmity identified by the Attorney General. DOR's letter stated that this remedy would  

                                                                                                              



allow a taxpayer that both produced and transported oil or gas to use the three-factor  

                                                                                                      



property, sales, and extraction formula of AS 43.20.144(c)(3).  The letter stated:  



                                                               

                    The department will follow the [Attorney General's] opinion  

                    and  allow  taxpayers  to  use  the  three-factor  apportionment  

                    formula in these circumstances pursuant to the authority of  

                    AS      43.19.010         Art.     4,   Sec.      18(c).        Accordingly,           an  

                    AS [43.20.144] taxpayer engaged both in the production of  

                    oil or gas from a lease or property in any jurisdiction and in  

                                                                              

                    the pipeline transportation of oil or gas in any jurisdiction  



          11        Tesoro took this position informally for the first time on January 6, 1999,       



in a written statement attached to and incorporated by reference in its request for an   

informal conference.  



          12         1993-99 FORMAL OP .A              TT 'Y GEN . 230-31, available at  1999 WL 1337804.  



                                                               -7-                                                             6838  


----------------------- Page 8-----------------------

                   may use an apportionment formula consisting of extraction,  

                                                          

                   property and sales . . . .  



                   In its assessment for the years 1996, 1997, and 1998, DOR adhered to its  

                        



November 19, 1999, letter and applied the three-factor formula of AS 43.20.144(c)(3)  



                                                                                                   

(hereinafter "the section 18 remedial formula" or "remedial formula") to Tesoro.  DOR  



also assessed penalties against Tesoro for its repeated unwillingness to recognize KPL  



as unitary with Tesoro's other subsidiaries.  



         C.        Past Proceedings  



                   Tesoro first appealed the assessments for the years 1994 to 1998 during  



informal conferences with DOR; it next appealed in proceedings before an administrative  



law judge; it finally appealed to the superior court.  The adjudicators at each stage agreed  



with  DOR's  initial  assessment  that  Tesoro  was  a  single  unitary  business  during  the  



relevant years; that the three-factor formula applied to Tesoro produced a constitutionally  



and statutorily fair apportionment of Tesoro's total income; and that Tesoro's conduct  



in filing its tax returns justified penalties.  



                   Thus, Administrative Law Judge Mark T. Handley conducted a ten-day  



hearing at which Tesoro and DOR presented testimony from Tesoro employees and  



                                                

executives,  DOR  auditors,  and  expert  witnesses  familiar  with  Tesoro's  business  



activities.  The administrative law judge also reviewed hundreds of exhibits, including  



Tesoro's internal financial records, Tesoro's public financial filings, correspondence  



                                                                                 

between Tesoro employees, and reports drafted by expert witnesses.  In determining that  



                                                                  

Tesoro's subsidiaries were a unitary business for the relevant years, the administrative  



law  judge  made  factual  findings  referring  to  the  evidence  and  relied  heavily  on  the  



                                                                   

testimony and reports of two of DOR's expert witnesses:  Professors James Smith and  



                                                          

Richard Pomp.  The administrative law judge found these two witnesses to be "very  



                                                            

persuasive," and stated that "these experts demonstrated an impressive understanding of  



                                                           -8-                                                    6838
  


----------------------- Page 9-----------------------

                                                                                                     

Tesoro's organization and business activities."  Both experts looked at evidence in the  



record   and   found   Tesoro   to   have   exhibited   functional   integration,   centralized  



management, and economies of scale and thus found Tesoro's subsidiaries to be one  



                                                     

unitary business.  The administrative law judge found these witnesses were particularly  



persuasive  as  compared  to  Tesoro's  witnesses,  whom  he  found  "less  convincing"  



because he found Tesoro's witnesses tried to divert focus away from relevant facts and  



were dismissive of the relevant legal factors.  By contrast, the administrative law judge  



                                                                                     

found  that  Professors  Pomp  and  Smith  identified  which  facts  in  the  record  were  



significant and that these experts provided "strong, but objective, opinions" as to the  



import of these facts.  



                                                                                                          

                   When Tesoro appealed to the superior court, Superior Court Judge Fred  



Torrisi affirmed the administrative law judge's decision.  The superior court held that  



Tesoro was a unitary business, that the formula applied to it was not constitutionally  



unfair, and that penalties were justified.  In its unitary-business holding, the superior  



                                                                                                 

court relied mainly on the factual findings of the administrative law judge and cited to  



                                                                       

the findings of shared administrative and financial services across Tesoro's subsidiaries.  



                   Tesoro now appeals to us.  



III.     STANDARD OF REVIEW  

                   We review questions of law de novo, using our independent judgment.13  



We apply the substantial evidence standard of review to disputed questions of fact in  

                                                                                                             

                                   14  In applying this standard, we will not re-weigh evidence or  

administrative decisions.                                                   



         13        Ross v. State, Dep't of Revenue , 292 P.3d 906, 909 (Alaska 2012);                         Harrod  



v. State, Dep't of Revenue, 255 P.3d 991, 995 (Alaska 2011).  



         14        State,  Dep't  of  Revenue  v.  DynCorp  &  Subsidiaries,  14  P.3d  981,  985  



(Alaska 2000) (quoting Handley v. State, Dep't of Revenue , 838 P.2d 1231, 1233 (Alaska  

                                               

                                                                                                      (continued...)  



                                                           -9-                                                    6838
  


----------------------- Page 10-----------------------

                                                                                   15  

                                                                                       

re-evaluate the fact finder's credibility determinations.                              Whether Tesoro's business is  



                                                                                               16  

unitary is a question of law that requires no agency expertise.                                     We will consider the  



                                                                                                                                  17  

                                                                                              

issue de novo, giving only "some weight" to the  agency's  decision on the matter. 



Determining the constitutionality of a given statute presents a question of law that we  



                         18  

                                                                                                                      

review de novo.              Statutory interpretation is also a question of law that we review de  



         19  

                                                                                                                            

novo.        In its appeal regarding penalties, Tesoro appears to argue that as a matter of law  



it cannot be penalized for violating an unconstitutional statute.  The penalties appeal  



                                                                        

therefore presents a question of law:  whether Tesoro should have been excused from  



          14        (...continued)  



1992)) (observing that substantial evidence standard applies to disputed questions of fact  

                                                                                            

in taxpayer's appeal of tax assessment).  



          15        See McKitrick v. State, Pub. Emps. Ret. Sys., 284 P.3d 832, 837 (Alaska  

                                                                                                          

2012) (quoting Lindhag v. State, Dep't of Natural Res. , 123 P.3d 948, 952 (Alaska  

                                                                                          

2005)).   



          16  

                                                                  

                    Earth Res. Co. v. State, Dep't of Revenue , 665 P.2d 960, 965 (Alaska 1983)  

                                                                                                   

("[W]e conclude that the question whether a taxpayer's business is unitary is a question  

of law which does not require agency expertise for its resolution.").  



          17        See Alaska Gold Co. v. State, Dep't of Revenue, 754 P.2d 247, 251 (Alaska  



                         

1988) (holding that question of whether taxpayer is a unitary business is reviewed de  

                                                     

novo giving only some weight to the agency's decision on the matter); Earth Res. Co. ,  

                                                                                                                    

665 P.2d at 964-65 (holding that substitution of judgment standard applies to supreme  

court's review of agency decision regarding the unitariness of a taxpayer's business).  



          18  

                                                                                            

                    Harrod , 255 P.3d at 995 (citing Eagle v. State, Dep't of Revenue , 153 P.3d  

976,  978  (Alaska  2007))  (applying  independent  judgment  standard  to  constitutional  

questions in tax assessment appeal).  



          19        Id. (citing  Temple v. Denali Princess Lodge, 21 P.3d 813, 815 (Alaska  



2001)) (applying independent judgment standard to questions of law in tax assessment  

appeal).  



                                                               -10-                                                         6838
  


----------------------- Page 11-----------------------

paying penalties because one aspect of the tax scheme under which it was penalized was  



                                                                              20  

unconstitutional. We review this question de novo.                                



IV.       DISCUSSION  



                                                                                                                     

                    Tesoro asks us to review three issues on appeal: (1) whether the tax scheme  



applied by DOR violates the Due Process and Interstate Commerce Clauses of the United  



States   Constitution;   (2)   whether   the   section   18   remedial   formula   is   statutorily  



unreasonable; and (3) whether the penalties DOR assessed against Tesoro are invalid.  



We consider each issue in turn.  



          A.        Tesoro's Constitutional Challenge To Formula Apportionment Fails.  



                    Under the Due Process and Interstate Commerce Clauses of the United  



                                                                                                               21 

                                                                                                                   The central  

States Constitution, a state "may not tax value earned outside its borders." 



                                                                                                                     22  

                                                                                                                         But the  

inquiry is "whether the state has given anything for which it can ask return." 



United States Supreme Court has long recognized that taxing multi-state companies  

                                                                                        



using strict geographic accounting  fails to account for "the many subtle and largely  

                                                        



unquantifiable  transfers  of  value  that  take  place  among  the  components  of  a  single  



                  23  

                      The unitary business/formula apportionment method of taxation is meant  

enterprise."                                                        



                                     24  

to remedy this problem.                  Under this method, a taxing state first identifies the unitary  



                                                                                                

business of which the taxpayer's in-state activities are a part and then apportions the  



          20        Ross v. State, Dep't of Revenue , 292 P.3d 906, 909 (Alaska 2012); Harrod ,  



255 P.3d at 995 (Alaska 2011).  



          21        ASARCO Inc. v. Idaho State Tax Comm'n , 458 U.S. 307, 315 (1982).  



          22         Wisconsin v. J.C. Penney Co., 311 U.S. 435, 444 (1940).  



          23         Container Corp. of Am. v. Franchise Tax Bd.                       , 463 U.S. 159, 164-65 (1983).   



          24        Id. at 165.  



                                                               -11-                                                         6838
  


----------------------- Page 12-----------------------

income of this unitary business to the taxing state according to a set formula.25                               Tesoro  

                                                                



challenges both the administrative law judge's finding that all of Tesoro's subsidiaries  



                             

constituted a single unitary business and the administrative law judge's application of the  



three-factor apportionment formula of AS 43.20.144(c).  We hold that Tesoro was a  



                                                       

unitary business amenable to formula apportionment and that Tesoro lacks standing to  



contest the application of the AS 43.20.144(c) three-factor apportionment formula.  



                   1.	      The administrative law judge did not err in finding Tesoro to be  

                            a single unitary business.  



                   Tesoro bears the burden of proving by clear and cogent evidence that the  



                                                                             26  

state tax results in extraterritorial values being taxed.                        In order for a business to be  



                                                                                                               

unitary, and thus amenable to formula apportionment, there must be flows of  value  



                                                27 

                                                                                                   

between the parent and subsidiary.                  The United States Supreme Court has distinguished  



these flows of value from the mere passive flow of funds that arises from any parent- 



                                 28  

subsidiary relationship.             Three "factors of profitability" indicate a unitary business:  



                                                                                                              29  

functional integration, centralization of management, and economies of scale.                                     



                   Tesoro argues that its involvement in its subsidiaries was the type of passive  



investor-investment relationship that exists between any parent and subsidiary.  DOR  



         25	       See id.  



         26        Id. at 164 (quoting Exxon Corp. v. Wis. Dep't of Revenue                          , 447 U.S. 207,  



221 (1980)).  



         27        Id. at 178-79.  



         28        Id. at 166.  



         29        Id. at 181 (quoting Mobil Oil Corp. v. Comm'r of Taxes , 445 U.S. 425, 438  



(1980)).  



                                                          -12-	                                                    6838
  


----------------------- Page 13-----------------------

                                                                                                     

counters that there were sufficient flows of value across Tesoro's business segments to  



justify the administrative law judge's finding of unitariness in this case.  



                     Although  Tesoro  asserts  that  it  is  not  disputing  the  administrative  law  



judge's  factual  findings,  it  repeatedly  makes  assertions  factually  at  odds  with  those  



                                                                                                        

findings.  The administrative law judge heard ten days of testimony and reviewed more  



                                                                                                          

than 30,000 pages of documents.  The administrative law judge also relied extensively  



                                                                                                              

on the report and testimony of Professor Smith, who reviewed much of the voluminous  



                       

record before providing his expert opinion as to the nature of Tesoro's business.  To the  



extent  that  Tesoro  explicitly  or  implicitly  challenges  the  administrative  law  judge's  

findings, we must determine whether substantial evidence supports those findings.30  



Applying the substantial evidence standard, we reject any challenge to the administrative  

                      



law judge's factual findings.  The administrative law judge relied on the facts discussed  

                                                                                  



by Professor Smith because he found Professor Smith to be persuasive and the facts  

                      



identified by Professor Smith to be relevant.  By contrast, the administrative law judge  

                                                                                                                      



found Tesoro's witnesses to be unconvincing, as they seemed to ignore the relevant facts  

                                                



in the record. Evidence in the record supports the facts reported by Professor Smith and  

                                     



found by the administrative law judge.  It is not our place to re-weigh evidence or re- 

                                                                                               

evaluate the credibility determinations of the administrative law judge.31  



                     As we explain below, Tesoro has not carried its burden of proving the non- 

                                                                                             



unitary nature of its business.  The facts as found by the administrative law judge show  

                                                                   



          30         State,  Dep't   of  Revenue  v.  DynCorp  &  Subsidiaries,  14  P.3d  981,  985  



(Alaska 2000).  



          31         See McKitrick v. State, Pub. Emps. Ret. Sys., 284 P.3d 832, 837 (Alaska  

                                                                                            

2012) (quoting Lindhag  v. State, Dep't of Natural  Res. , 123 P.3d 948, 952 (Alaska  

                                                                    

2005)).   



                                                               -13-                                                         6838
  


----------------------- Page 14-----------------------

that Tesoro's relationship with its subsidiaries fits within relationships that we and the                                                           



United States Supreme Court have held to be unitary.  



                                       a.           Tesoro's subsidiaries were functionally integrated.  



                          Tesoro contends that the subsidiaries within the E&P and R&M segments                   



were not functionally integrated because there was no overlap in any "actual function"   



between them. Tesoro admits that it provided its subsidiaries with shared administrative                               



and financial services, but asserts that the absence of "synergistic operations" between   



the subsidiaries within E&P and R&M is fatal to finding functional integration.  



                          The  pertinent  case  law  refutes  Tesoro's  restrictive  interpretation  of  the  



                      

functional integration concept.  In Container Corp. of America v. Franchise Tax Board,  



                                                        

the United States Supreme  Court held a paperboard company to be unitary with its  



                                                                              

subsidiaries where the parent  provided the subsidiaries with loans and loan guarantees,  



                                                                                                                                       

occasional assistance in obtaining equipment and fulfilling personnel needs, and general  



                                                32  

                                                     In Alaska Gold Co. v. State, Department of Revenue , we  

oversight and guidance.                                                                              



upheld a finding of functional integration where the parent approved capital expenditures  



greater than $100,000, handled salaries and payroll for executives, and guaranteed the  

                                                                                                       



                                                               33  

subsidiaries'  lease  obligations.                                   And  in  Earth  Resources  Co.  of  Alaska  v.  State,  



Department of Revenue , we upheld a unitary business finding where the parent provided  

                                                                                                                        



the subsidiary with loans and loan guarantees, a uniform pay scale, salary guidelines, and  

                                                                                          

                                                    34   In each of these cases the courts examined the same sorts  

a uniform retirement plan.                                                                            



             32           463 U.S. at 179-80.  



             33           754 P.2d 247, 252 (Alaska 1988).  



             34           665 P.2d 960, 969 (Alaska 1983).  



                                                                                 - 14-                                                                                6838  


----------------------- Page 15-----------------------

of administrative and financial services that Tesoro argues are irrelevant.  In two of these  

                                              

cases there was little or no "operational synergy."35  



                                                                                         

                   Tesoro provided services to its subsidiaries to a greater degree than did the  



                                            

taxpayers in all of these cases combined.  Like the taxpayers in Container Corp., Alaska  



Gold, and Earth Resources , Tesoro provided its subsidiaries with both loans and loan  



guarantees.  As the administrative law judge observed:  



                   Tesoro's business segments jointly guaranteed major loans or  

                   "credit  facilities"  during  the  audit  period.    CEO  [Bruce]  

                    Smith explained that the purpose of these credit facilities was  

                   to  keep  the  entire  corporation  going  and  that  the  credit  

                                                                              

                    facilities were not dedicated to a particular business segment.  

                                                                    

                   Tesoro's central management used the funds obtained from  

                                             

                   the major credit facilities to finance purchases by individual  

                    subsidiaries as well as to provide working capital for general  

                                                     

                   corporate purposes.  The heads of R&M and E&P were not  

                   involved  in  obtaining  financing  to  fund  their  operations  

                   because  these  functions  were  performed  by  CEO  [Bruce]  

                                                                                  

                    Smith, Mr. [William] Van Kleef and the corporate finance  

                                                                            

                   department.    



(Footnotes omitted.)  



                   In the portion of his report cited by the administrative law judge, Professor  

                                                                                                  



Smith noted that these credit facilities were secured using corporate-wide assets and that  

                                           



the funds were made available to the subsidiaries as needed.  



                   Tesoro's involvement in financing the subsidiaries went beyond merely  



loaning money to the subsidiaries.  As the administrative law judge explained:  



          35       See Container Corp. of Am., 463 U.S. at 172 ("Sales of materials from  

                                           

appellant  to  its  subsidiaries  accounted  for  only  about  1%  of  the  subsidiaries'  total  

purchases."); Earth Res. Co. of Alaska , 665 P.2d at 968 ("[T]here is no highly integrated  

                                                                           

flow of business between the business entities. . . .").  



                                                            -15-                                                          6838  


----------------------- Page 16-----------------------

                    Various bank accounts were used during the course of the  

                    audit period to receive customer remittances.  However, at  

                                        

                    any  one  time,  a  single,  shared  bank  account  was  used  to  

                                                                      

                    receive remittances from customers of all the subsidiaries.  

                                 

                    Funds  belonging  to  the  respective  subsidiaries  were  all  

                                                            

                    directed  to  the  same  account  so  that  these  funds  were  

                    available  to  fund  the  working  capital  needs  of  all  Tesoro  

                                                                     

                    subsidiaries.   



(Footnotes omitted.)  



                    In the portion of his report cited by the administrative law judge, Professor  

                                                             



Smith   elaborated   on   how   cash   management   was   functionally   integrated   across  

                                            



subsidiaries.  He explained that because Tesoro set overall limits on capital expenditures,  

                                                                                                     



capital investments made by one subsidiary had to be offset by investments in other  



subsidiaries.  



                    Thus,   Tesoro   exercised   near-complete   control   over   the   funding   of  

                                                                                                          



subsidiary operations.  Tesoro pooled customer remittances from all its subsidiaries into  

                                                                        



a shared bank account and then distributed this money back to the subsidiaries.  There  

                                    



was evidence that local management had no knowledge or control of the sources of their  



operational funds.  Furthermore, Tesoro controlled the capital investments made by each   



subsidiary and set an overall limit on capital investment across subsidiaries.  



                                                                                                   

          Like the taxpayers in Alaska Gold  and Earth Resources , Tesoro also provided  



                                                

guidance on personnel matters.  The administrative law judge found that Tesoro's human  



resources  department  provided  uniform  stock  option  plans,  benefits,  and  salary  



guidelines across subsidiaries.  



                    Moreover,  like  the  taxpayer  in  Container  Corp.,  Tesoro  provided  its  



                                                     

subsidiaries with general oversight and guidance.  As described in more detail below, the  



                                                                    

administrative law judge found that Tesoro's board of directors was active in overseeing  



                                                              -16-                                                         6838
  


----------------------- Page 17-----------------------

operations  of  the  subsidiaries.    The  Tesoro  board  reviewed  and   approved  annual  



operating budgets, major expenses, and specific projects for the subsidiaries.  



                                                                                      

                    Tesoro's involvement with its subsidiaries went beyond what was held to  



be sufficient in the three cases cited above.  The administrative law judge found that  



Tesoro   also   provided   its   subsidiaries   with   uniform   services   in   the   fields   of  



environmental  compliance  and  safety,  information  services  and  technology,  internal  



                                                                                                 

auditing, legal affairs, insurance, risk management, purchasing, and accounting.  These  



                                                                                                  

shared  services  refute  Tesoro's  assertion  that  its  subsidiaries  were  not  functionally  



integrated.  



                                 

                    Tesoro  argues  that  because  its  witnesses  testified  that  the  value  of  the  



                        

administrative services it provided to its subsidiaries accounted for only a "trifling" one  



                        

to two percent of its overall costs, these services do not indicate functional integration.  



                                                                                   

But  the  administrative  law  judge  did  not  credit  the  testimony  Tesoro  cites  for  this  



                                                                 

proposition; he instead found the value of the relevant services to be $100 million over  



                                                           

the  five  audited  years.    Tesoro  also  contends  that  the  administrative  law  judge,  in  



                                                                                     

calculating the flow of value created by these services, erroneously relied on the price  



                                                                                                  

Tesoro charged its subsidiaries for these services, rather than the difference between the  



price Tesoro charged and the price the subsidiaries would have been charged via arms- 



                                                                                        

length transactions in the open market.  Tesoro's view of the law would mean that had  



Tesoro charged its subsidiaries market prices for these shared services, there would have  



                          

been no flow of value.  But in Alaska Gold we stated that even if the goods and services  



                                                                                                                  

provided by parent to subsidiary were priced "at prevailing market prices, they [were]  



                                                                                                              36  

                                                                                                                  Regardless,  

nonetheless evidence that the companies were not acting independently." 



the administrative law judge did find that significant flows of value existed because he  



          36        754 P.2d at 252.  



                                                              -17-                                                             6838  


----------------------- Page 18-----------------------

found that the prices Tesoro charged its subsidiaries for administrative and financial  



services did not accurately quantify the services' actual value.  



                   Tesoro  further  argues  that  there  was  no  functional  integration  across  



                                             

subsidiaries because, it asserts, each subsidiary had "autonomous local management that  



                                                                                                          

made all day-to-day decisions."  This contention, even if factually correct, would not be  



dispositive.  In Container Corp., the United States Supreme Court upheld a finding of  



functional integration even though the parent company handled only "major problems  



and long-term decisions" and "day-to-day management of the subsidiaries" was left to  

local management.37  



                            b.        Tesoro centrally managed its subsidiaries.  



                   Tesoro argues that no centralized management existed during the relevant  



period because it had no major role in the operational matters of its subsidiaries.  Tesoro  



                                              

instead presents itself as a mere financial overseer, responsible only for capital structure,  



major debt, and dividends.  



                                                                                               

                   But the administrative law judge found that Tesoro's role was in fact much  



                                                                                                        

broader than this.   During the relevant period, all of Tesoro's subsidiaries were governed  



                                                                 

by Tesoro's very active board of directors.   The administrative law judge found that  



                                                                      

Tesoro's board met frequently to make all major financial and operational decisions for  



                                                                

the subsidiaries.   In making this finding, the administrative law judge found relevant the  



testimony of two senior Tesoro executives who discussed how their operational expertise  



                                                                                

and management assistance benefitted E&P and R&M.  Furthermore, in the portion of  



                              

his  testimony  cited  by  the  administrative  law  judge,  Professor  Smith  estimated  that  



Tesoro's board met almost monthly to discuss issues regarding the subsidiaries.  By  



contrast,  the  administrative  law  judge  found  that  the  boards  of  the  subsidiaries  that  



          37       463 U.S. at 172.  



                                                           -18-                                                        6838  


----------------------- Page 19-----------------------

comprised  E&P  and  R&M  never  met  during  the  relevant  period  and  that  these  



                                                        

subsidiaries' boards instead acted by signing written consent resolutions handed down  



to them by Tesoro's corporate arm.  



                                           

                   In  the  portion  of  his  testimony  cited  by  the  administrative  law  judge,  



Professor Smith also gave examples of the specific projects that Tesoro's corporate board  



discussed and approved.  Many of these were Alaska-based projects.  For example, the  



                                                                                              

Tesoro board discussed increasing the frequent-filler program at Alaskan Tesoro service  



                              

stations, expanding Tesoro's asphalt sales in Alaska, upgrading the Girdwood service  



                              

station,  increasing  home-heating  sales  in  Fairbanks,  and  expanding  the  Alaskan  



hydrocracker plant and the effects that expansion would have on the jet fuel market in  



                                                                                                                       

Anchorage.  Tesoro was not a passive rubber-stamp of any independent decisions by the  



                            

subsidiaries.  For example, Professor Smith testified that in 1997 Tesoro's corporate  



                                                     

board actually sent back the annual budget submitted by R&M and required revisions.  



                                                                                  

This hands-on Tesoro involvement in Alaskan business refutes any claim that Tesoro's  



                                                                                                             

Alaska-based subsidiaries should have been treated as somehow insulated from the rest  



of Tesoro's business enterprise.  



                             c.        Tesoro's business exhibited economies of scale.  



                                                                                                           

                    Tesoro argues that there were no economies of scale because the interaction  



                                                                                                                 

between parent and subsidiaries during the taxing period represented flows of funds, not  



flows of value.  



                                                                    

                   But the administrative law judge found that Tesoro experienced significant  



cost savings by providing its subsidiaries with centralized services instead of leaving  



each  segment  to  source  these  services  itself.    In  the  portion  of  his  report  the  



administrative  law  judge  cited  for  this  proposition,  Professor  Smith  observed  that  



eliminating administrative redundancies and offering consolidated services saved Tesoro  



$2.24 million a year.  Professor Smith further observed that this figure amounted to  



                                                            -19-                                                       6838
  


----------------------- Page 20-----------------------

approximately 10% of the value of providing these services in total.                                         The administrative  



law judge also found that providing these services created further unquantifiable flows               



of  value  by  allowing  local   management  to  focus  on  day-to-day  business  operations  



without worrying about these administrative and financial matters.  



                                                                                   

                     Furthermore, in Earth Resources we upheld a finding that economies of  



                                                                           

scale existed because the subsidiary was able to receive financing at lower rates due to  



the  parent's  ability  to  negotiate  lower  interest  rates  for  all  subsidiaries  than  any  



                                                                            38  

subsidiary  could  have  negotiated  on  its  own.                                Here  the  administrative  law  judge  



explicitly credited Professor Smith's testimony on the subject and found that Tesoro and  

                                                                                                   



its subsidiaries experienced approximately $30 million in interest savings over the five  

                                                                                                                                



audited years through the use of shared credit facilities.  In fact, in the cited portion of  



                                                                                             

his  testimony,  Professor  Smith  explained  that  Tesoro  Alaska  was  able  to  obtain  



                     

commercial credit from BP for the shipment of crude oil only after Tesoro provided a  



letter of credit.  



                                d.	        Tesoro's other arguments against a unitary finding are  

                                           unpersuasive.  



                                                             

                     Tesoro  asserts  that  the  case  most  analogous  to  the  facts  here  is  F.  W.  



                                                                                                            39  

                                                                                                                 But we consider  

Woolworth Co. v. Taxation & Revenue Department of New Mexico. 



Woolworth to be distinguishable in every material respect.  The United States Supreme  

                                                                                               



Court held there that "no phase of any subsidiary's business was integrated with the  

                                                                                                                              



                40  

parent's."          In so holding, the Court noted the absence of the very administrative and  

                                                                       



           38         665 P.2d at 970.  



           39        458 U.S. 354 (1982).  



           40        Id. at 365 (emphasis in original).  



                                                                  -20-                                                                 6838  


----------------------- Page 21-----------------------

                                               41  

financial services present here.                    Furthermore, in  Woolworth  the parent did not control      



subsidiary  funds.    Instead,  each  subsidiary  "was  responsible  for  obtaining  its  own  



                                                                     42  

                                                                                                            

financing from sources other than the parent."                           Finally, in Woolworth the parent had no  

involvement in overseeing subsidiary operations.43  Here Tesoro was active in overseeing  



subsidiary operations.  



                     Tesoro also argues that vertical or horizontal integration is a necessary  



                                                                                   

condition  for  finding  a  unitary  business.    Tesoro  cites  no  case  that  affirmatively  



                                                                                                                

establishes  this  principle,  but  asserts  that  it  must  be  true  because  no  United  States  



                                                                                                   

Supreme Court case denies it.  Tesoro's position is problematic for two reasons.  First,  



                                                          

the United States Supreme Court has been reluctant to issue bright-line rules such as the  



                                                                                                              

one Tesoro proposes, saying instead that the mutual interdependence necessary for a  

                                                                                                   44    Second,  in  Earth  

unitary  business  finding  can  arise  in  "any  number  of  ways."       



Resources  we  upheld  a  unitary  business  finding  even  where  there  was  "no  highly  



                                                                                              45  

integrated  flow  of  business  between  the  business  entities."                                   We  decline  Tesoro's  



invitation to overrule past precedent in order to enforce the negative, and unsupported,  

                                                                                             



inference Tesoro would read into the case law.  For these reasons, we hold that Tesoro  

                                                                          



was a single unitary business throughout the relevant period.  



          41        Id. at 365-67 (holding businesses not unitary where there was absence of          



centralized accounting, legal counsel, financing, and purchasing).  



          42        Id . at 366.  



          43        Id . at 367-68.  



          44         Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 179 (1983).  

                                                           



          45        Earth Res. Co. of Alaska v. State, Dep't of Revenue , 665 P.2d 960, 968  



(Alaska 1983).  



                                                               -21-                                                          6838
  


----------------------- Page 22-----------------------

                    We recognize that one respected treatise has questioned our holding that the  



                                                                                                      46  

                                                                                                                  

two  businesses  in  Earth  Resources  constituted  a  unitary  enterprise.                                We  read  that  



                                                                                                

criticism to stem from the authors' opinion as to what constitutes sound state tax policy,  



                                                                                          47  

not  the  case-based  requirements  of  the  federal  constitution.                             Tesoro's  appeal  from  



                                                                     

DOR's unitary business finding turns only on federal constitutional grounds.  There is  



                                                                       

no  issue  before  us  about  whether  a  different  tax  policy  would  be  preferable.    The  



legislative  and  executive  branches  made  the  controlling  policy  choices.  The  only  



question for us in this case is whether those choices satisfy the federal constitution.  



          46        1 JEROME R.  HELLERSTEIN &  WALTER HELLERSTEIN ,   STATE TAXATION    



8.10[2][a][ii], at 8-159 to 8-162 (3d ed. 2012).  



          47        The commentator's analysis is based on his "operational interdependency  



test."  Id .    8.10[2][a][ii],  at  8-160  nn.697-98  (citing    8.09[4]  of  treatise).  This  test  

explicitly rejects the United States Supreme Court's holding in Container Corp.  Id.   

8.04[c], at 8-147 ("The fact that there may be a 'flow of value' among the business  

segments in a sense sufficient to treat the business segments as unitary under federal  

constitutional  standards  does  not,  in  and  of  itself,  justify  treating  such  income  as  

apportionable as a matter of sound tax policy.").  The treatise, however, acknowledges  

                                       

that other states have adopted a broader view of the unitary business principle.  Id.    

                

8.03, at 8-139 n.619 (citing cases from California, Kansas, Oregon, Utah, and Wisconsin  

                                                 

as  applying  the  broad  approach).    Those  states  that  have  adopted  the  operational  

interdependency test have done so as a matter of state law.  See, e.g., State ex rel. Ariz.  

                                                                     

Dep't of Revenue v. Talley Indus., Inc. , 893 P.2d 17, 24-25 (Ariz. App. 1994);  Cox  

Cablevision Corp. v. Dep't of Revenue, No. 3003, 1992 WL 132428, at *3 (Or. T.C.,  

                                                                                                         

June 10, 1992).  Moreover, the treatise praises the superior court's opinion in this case,  

                                                           

describing that opinion as "extremely thoughtful, thorough, and fact-intensive."  Id .   

8.10[2][a][iii],  at  8-162.    In  this  regard  we  agree  with  the  treatise:    Judge  Torrisi's  

                                            

opinion is commendable.  



                                                             -22-                                                       6838
  


----------------------- Page 23-----------------------

                    2.	       Tesoro lacks standing to challenge the internal consistency of  

                              Alaska's tax scheme because Tesoro does not demonstrate that  

                                                                                                

                              it was injured by any inconsistency in this scheme.  



                    Having affirmed the determination that Tesoro's subsidiaries constituted  



a   single  unitary   enterprise,  we  must  next  address  Tesoro's  argument   that   the  

                                                                                                   



apportionment scheme applied by DOR was internally inconsistent and thus violated the  

                                                                                                   



Due Process and Interstate Commerce Clauses of the United States Constitution.  As the  

                                                                                                   



United States Supreme Court stated in Container Corp.:  



                    [A]n  apportionment  formula  must,  under  both  the  Due  

                    Process and Commerce Clauses, be fair. The first, and again  

                                                                                        

                    obvious, component of fairness in an apportionment formula  

                                                                       

                    is what might be called internal consistency - that is the  

                                                                                                     

                    formula must be such that, if applied by every jurisdiction, it  

                    would result in no more than  all of the unitary business's  

                                                  [48] 

                    income being taxed.  



                                         

                    The  test  for  internal  consistency  posits  a  situation  in  which  every  



                                            

jurisdiction  applies  the  tax  at  issue;  the  test  then  determines  whether  under  such  



                                                                                                                              49  

                                                                                                   

circumstances more than 100% of the taxpayer's income would be subject to taxation. 



The hypothetical situation envisioned by the internal consistency test is valuable because  

                                                             



it allows courts to identify when "a State is attempting to take more than its fair share of  

                                                                                            



                                                        50  

taxes from the interstate transaction."                      In applying this test, courts are attempting to  



prevent the taxing state from "overreaching" such that "the portion of value by which  

one State exceed[s] its fair share [is] taxed again by a State properly laying claim to it."51  



          48        463 U.S. at 169 (citations omitted).  



          49        See id.  



          50        Okla. Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175, 185 (1995).  



          51        Id. at 184-85.  



                                                             -23-	                                                       6838
  


----------------------- Page 24-----------------------

                    Tesoro  argues  that  Alaska's  tax  scheme  is  unconstitutional  because  it  



potentially applies two different formulas - either the section 18 property, sales, and  



                                                                                                          

extraction formula or the section 9 property, sales, and payroll formula - and thus could  



                                                                                                               

result in more than 100% of a taxpayer's income being taxed.  Tesoro is correct that  



                                               

DOR's taxing scheme applies one of two different apportionment formulas depending  



                                                                 

on a taxpayer's in-state business activity.  Per the terms of DOR's November 19, 1999  



advisory letter, the section 18 remedial formula applies to any "AS [43.20.144] taxpayer"  



                                                                                                                 

that both produces and transports oil or gas.  But this formula only applies to a taxpayer  



that  conducts  at  least  one  of  these  activities  in  Alaska,  because  AS  43.20.144  only  



                                      52 

                                                                                                 

applies to such taxpayers.                Thus, a taxpayer that both produces and transports oil or gas  



anywhere and also does at least one of these activities in this state is taxed under the  



                                                                                                                                 53  

                                                    

section 18 remedial formula that includes the property, sales, and extraction factors. 



But a taxpayer that both produces and transports oil or gas but does neither of those  



activities in this state is instead taxed under the formula prescribed in AS 43.19.010,  



article IV, section 9 that includes the property, sales, and payroll  factors.  



                                                                           

                    DOR urges us to ignore this feature of Alaska's tax code and consider only  



                                                                              

the specific three-factor formula that it applied to Tesoro in Alaska, not the entire tax  



scheme  that  also  contains  a  different  formula  that  potentially  applies,  depending  on  



                                                                                                                  

which activities the taxpayer conducts in the taxing jurisdiction. DOR thus assumes, for  



                                                                

purposes of determining consistency, that every jurisdiction taxing Tesoro would use the  



                                                                                                       

section 18 remedial formula. This assumption fails to recognize that jurisdictions where  



          52        See AS 43.20.144(a) (stating that section .144 applies only to taxpayers  



"engaged in the production of oil or gas . . . in this state or engaged in the transportation  

                                                                             

of oil or gas by pipeline in this state").  



          53        Because it is the only fact pattern relevant to this appeal, we will limit our  

                                                                                               

discussion to taxpayers, like Tesoro, that both transport and produce oil or gas.  



                                                              -24-                                                         6838
  


----------------------- Page 25-----------------------

Tesoro neither produces nor transports oil or gas would instead tax Tesoro under the  



                                        

AS 43.19.010, article IV, section 9 formula.  In effect, DOR would look narrowly at the  



                                                                                                                   

formula it actually applied here rather than at the broader statutory scheme.  This is not  



                                                                                                      

the test.  In Armco Inc. v. Hardesty , the United States Supreme Court assessed an internal  



consistency  challenge  to  a  West  Virginia  tax  scheme  in  which  businesses  that  



                                                                                                                   

manufactured in state were subject to a  manufacturing tax, businesses that sold goods  



                                                             

at wholesale in state were subject to a wholesaling tax, and businesses that did both  



                                                                                                     

activities in state were exempt from the wholesaling tax but subject to the manufacturing  



      54  

tax.      The tax scheme was analogous to the one at issue in this case in that taxpayers  



                                                                           

were subject to different tax formulas depending on the extent of their in-state business  



               55  

                   A taxpayer that sold at wholesale in  state but manufactured out of state  

activities.                                                                  

                                                                                         56  If DOR were correct, the  

challenged the constitutionality of West Virginia's scheme.  

                                                                                              



United States Supreme Court should have scrutinized only "the formula actually used"  

                                              



for the taxpayer:  the exemptionless wholesaling tax.  It did not.  The Court instead  



scrutinized the "precise scheme" and held that the scheme was internally inconsistent  



                          

because under it taxpayers "from out of State [would] pay both a manufacturing tax and  



a  wholesale  tax  while  sellers  resident  in  West  Virginia  [would]  pay  only  the  

                               57    The  Court  was  specifically  interested  in  the  potential  for  

manufacturing  tax."      



                                                                       58  

differential application of the various formulas.                          We therefore reject DOR's invitation  

                   



          54        467 U.S. 638 (1984).  



          55        Id. at 642.  



          56        Id . at 639-41.  



          57        Id. at 644.  



          58        Id .  



                                                              -25-                                                         6838
  


----------------------- Page 26-----------------------

to consider only the particular three-factor formula applied here; we instead look at the  

                                                                   



precise  two-formula  scheme  at  issue  when  evaluating  Tesoro's  internal  consistency  

                                                                                       



challenge.  



                                                                 

                     On appeal, Tesoro bases its internal consistency argument on an example  



that  illustrates  the  property,  sales,  extraction,  and  payroll  factors  for  a  hypothetical  



                                                                                                                    

taxpayer  that  is  amenable  -  as  was  Tesoro  -  to  taxation  in  Alaska,  Texas,  and  



California.  Per Tesoro's hypothetical example, the taxpayer is subject to the property,  



                                                                    

sales, and extraction formula in Alaska and Texas, and is subject to the property, sales,  



and payroll formula in California (where it neither produces nor transports oil or gas).  



                                                                                                                             

The example's choice between different apportionment formulas causes 106.7% of the  



                                                                                

hypothetical taxpayer's income to be taxed in total.  In its opening brief, Tesoro appears  



                                               

to argue that this hypothetical taxpayer bears no specific relationship to Tesoro.  Tesoro  



there argues only that the example shows how DOR's proposed tax structure could result  



                                                            

in  double  taxation  if  it  were  applied  to  "a  business  with  production  and/or  pipeline  



                                         

activities outside but not inside Alaska."  Tesoro was not such a business during the  



                                                                    

contested years because it owned KPL, an Alaska-based pipeline, and Tesoro did not  



                                                                                                              

otherwise assert that its hypothetical example in fact described Tesoro's actual situation.  



                                                                                     

Although we reserve judgment on the issue, the only state to have reached the issue  



rejected  a  taxpayer's  argument  that  internal  inconsistency  can  be  demonstrated  by  



                                                                                                                                   59  

                                                                        

applying a tax scheme to a purely hypothetical taxpayer rather than the actual taxpayer. 



                     In its reply brief, Tesoro subtly refines its argument.  It there contends that  



the example in its opening brief was meant to illustrate Tesoro's actual business situation  



                                                                              

and thus that the example showed that if all states adopted Alaska's tax scheme Tesoro  



          59  

                                                                                     

                    See In re Alt. Minimum Tax Refund Cases, 546 N.W.2d 285, 290-91 (Minn.  

1996).  



                                                               -26-                                                              6838  


----------------------- Page 27-----------------------

"would  face an unconstitutional apportionment of more than 100% of its income."60  



(Emphasis added.)  



                     We will address arguments that a party has properly asserted and briefed  



                                                                              61  

                                                                                  The taxpayer bears the burden of  

and decline to address arguments that it has not. 



                                                                                                       62 

                                                                                                            Tesoro has alleged  

establishing the internal inconsistency of the challenged tax statute. 



                                                                           

an internal consistency violation exclusively in context of the specific hypothetical facts  



                                                                                                       

set out in its example.  Accordingly, we will address the internal consistency argument  



under  the  assumption  that  the  information  in  the  example  is  substantially  similar  to  



                                          

Tesoro's  actual  business  situation.    We  consider  Tesoro  to  have  waived  any  other  



internal consistency challenge to Alaska's tax scheme.  



                     Because Tesoro has not explained how it has been harmed by any internal  



inconsistency  in  Alaska's  tax  scheme,  Tesoro  lacks  standing  to  raise  its  internal  



                                                                  

consistency argument.  "Standing is a rule of judicial self-restraint based on the principle  



           60        Tesoro has a colorable claim that it has been making this argument all                  



along.  Like Tesoro, the hypothetical taxpayer exemplified in its opening brief is taxed  

under the property, sales, and extraction formula in Alaska and thus, like Tesoro, must  

                                                                                                              

have produced or transported oil or gas in Alaska.  Confusingly, the text of Tesoro's  

opening   brief   describes   the   exemplified   taxpayer   as   having   no   production   or  

transportation inside Alaska.  Nonetheless, the example itself supports an assertion -  

                                                                           

refined in Tesoro's reply brief - that the example illustrates Tesoro's actual situation  

even though the text of Tesoro's opening brief suggests otherwise.  We therefore assume  

                           

that Tesoro's reply brief permissibly refines its prior argument, and thus preserves the  

                                                                                                      

contention for appellate review.  



           61        See, e.g., McGraw v. Cox , 285 P.3d 276, 281 (Alaska 2012).  



           62        Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 170 (1983)  



(quoting Moorman Mfg. Co. v. Blair , 437 U.S. 267, 274 (1978)).  



                                                                 -27-                                                           6838
  


----------------------- Page 28-----------------------

                                                                                                                     63  

                                                            

 that courts should not resolve abstract questions or issue advisory opinions."                                          In order  



 to have interest-injury standing, a plaintiff must have an interest adversely affected by  



                                              64  

                                                                                              

 the    complained-of            conduct.             Tesoro        complains         that     DOR's         tax    scheme        is  



 constitutionally infirm because the scheme chooses between two different apportionment  



                         

 formulas.  But Tesoro has not shown that it has been adversely affected by this choice.  



                                                                 

 Instead, Tesoro's example demonstrates that DOR applied the formula that was more  



favorable  to Tesoro.  Its example states that the property, sales, and extraction formula  



 allowed 46.7% of its income to be subject to taxation in Alaska.  But its example also  



                                                                                              

 demonstrates that 65% of Tesoro's total income would have been subject to taxation in  



                                                                                 65 

                                                                                     The 6.7% of double taxation that  

 Alaska under the property, sales, and payroll formula. 



                                             

 Tesoro's example identifies is the amount by which California's hypothetical property,  



                                                                                                               

 sales, and payroll apportionment would exceed California's hypothetical property, sales,  



 and  extraction  apportionment.    As  footnote  65  indicates,  in  presenting  its  example,  



 Tesoro has not demonstrated that the inconsistency it identifies has increased its tax  



           63        Friends of Willow Lake, Inc. v. State, Dep't of Transp. & Pub. Facilities,   



 Div. of Aviation & Airports , 280 P.3d 542, 546 (Alaska 2012) (quoting                                      Law Project for  

 Psychiatric Rights, Inc. v. State , 239 P.3d 1252, 1255 (Alaska 2010)).  



           64        Id. (quoting  Keller v. French , 205 P.3d 299, 304 (Alaska 2009)).  



           65  

                                                           

                     In Tesoro's example the taxpayer's property, extraction, sales, and payroll  

                                                                           

 factors in Alaska are 65%, 0%, 75%, and 55%, respectively.  The taxpayer's property,  

 extraction,  sales,  and  payroll  factors  in  Texas  are  30%,  100%,  20%,  and  25%,  

 respectively.    And  the  taxpayer's  property,  extraction,  sales,  and  payroll  factors  in  

                                                                                         

 California are 5%, 0%, 5%, and 20%, respectively.  Applying the property, sales, and  

 extraction formula in Alaska causes 46.7% ((65% + 0% + 75%) / 3 = 46.7%) of the  

 taxpayer's total income to be subject to taxation in Alaska, while applying the property,  

 sales, and payroll formula in Alaska causes 65% ((65% + 75% + 55%) / 3 = 65%)) to be  

                                                                                                                               

 subject to taxation in Alaska.  The hypothetical example demonstrates that the formula  

                               

 Alaska chose to apply is more favorable to Tesoro (taxing 46.7%, rather than 65%, of  

 Tesoro's total income) than the alternative formula.  



                                                                -28-                                                         6838
  


----------------------- Page 29-----------------------

burden in Alaska.  Tesoro therefore lacks standing to raise its internal consistency claim  



                                                                                                                   

because it has not identified an actual injury it has suffered as a result of the alleged  



constitutional infirmity.  



                    Tesoro cites Armco v. Hardesty for the proposition that it need not show  



                                   

actual double taxation because the constitutional harm under the internal consistency test  



                                            66  

                                                In Armco , the United States Supreme Court rejected the  

is the risk of double taxation.                                  



argument that the taxpayer attacking the West Virginia tax scheme described above was  

                                                                      



required to show that other states where it did business actually applied a manufacturing  

                                                                                   



tax to it that caused its total tax burden to be higher than the tax burdens of its in-state  

                                                                                         67  The Court held that if this  

competitors who benefitted from the challenged exemption.                                            



were the test it "would depend on the shifting complexities of the tax codes of 49 other  

                        



States, and . . . the validity of the taxes imposed on each taxpayer would depend on the  

                                                                                                    

particular other States in which it operated."68  

                                                                        



                    To show injury here Tesoro is not required to demonstrate that multiple  

                          



taxation has resulted because other states have treated it unfairly.  It must only show that  

                                                               



there is a risk of multiple taxation because this state, Alaska, has treated it unfairly.  But  

                                                                                                                



unlike the taxpayer in Armco , Tesoro has not made this showing.  In Armco , the taxpayer  

                                                                                                  



was an out-of-state manufacturer that suffered injury because West Virginia refused to  

        



                                                                                                         69  

grant it a tax exemption that was available to in-state manufacturers.                                       West Virginia  



could have cured the injury by granting the exemption to the taxpayer regardless of the  

                                 



location of the taxpayer's manufacturing activity.  By contrast, Tesoro has suffered no  

                                                                              



          66        Armco v. Hardesty , 467 U.S. 638 (1984).  



          67        Id. at 644-45.  



          68        Id. at 645.  



          69        Id. at 640-41.  



                                                              -29-                                                         6838
  


----------------------- Page 30-----------------------

                                                                                                                          

injury as a result of DOR's failure to apply the property, sales, and payroll formula to it  



                               

because application of this formula in Alaska would have caused Tesoro's Alaska tax  



                                                                                          

burden to increase.  The risk of double taxation that Tesoro alleges is not affected by  



Alaska's choice between two possible three-factor tax formulas.  Instead, the risk of  



                                                                                                 

double taxation in this case is caused entirely by the possibility that California and Texas  



                                            

may choose tax formulas that would increase Tesoro's tax burden.  Because Tesoro has  



not  demonstrated  that  it  has  suffered  any  harm  as  a  result  of  the  alleged  internal  



inconsistency, it has failed to establish its standing in this case.  We do not see why a  



taxpayer should be excused from application of a tax scheme whose alleged internal  



                                

inconsistency results in no-less-favorable tax treatment than would have resulted from  



a consistent scheme.  



                                                                             

          B.	       The Administrative Law Judge Did Not Err In Finding That DOR's  

                                                                                                              

                   Alternative Apportionment Formula Was Reasonable As Applied To  

                    Tesoro.  



                   Alaska  Statute  43.19.010,  article  IV,  subsection  18(c)  gives  DOR  the  



authority  to  add  an  additional  factor  to  an  apportionment  formula  if  the  formula  



otherwise prescribed by statute does not fairly represent the extent of the taxpayer's in- 



                                                                                         

state business activity.  But section 18 permits DOR to apply an alternative formula only  



                        70  

                              As  we  have  stated  in  the  past,  "[i]nherent  in  the  use  of  formula  

"if  reasonable." 



          70	      AS 43.19.010, art. IV,  18 provides:  



                                                                                                   

                             If the allocation and apportionment provisions of this  

                   Article do not fairly represent the extent of the taxpayer's  

                   business activity in this state, the taxpayer may petition for or  

                                                                                 

                   the tax administrator may require, in respect to all or any part  

                                                                                             

                    of the taxpayer's business activity, if reasonable:  



                             (a) separate accounting;  

                                                                                                           (continued...)  



                                                            -30-	                                                      6838
  


----------------------- Page 31-----------------------

apportionment  is  the  legislative  decision  that  a  certain  degree  of  distortion  will  be  



                71  

tolerated."         In determining whether the section 18 remedial formula DOR adopted met  



                     

the statutory "if reasonable" test, the question is whether the formula is within tolerable  



          72  

limits.       



                                                                                  

                    DOR argues that the administrative law judge correctly placed the burden  



                     

on Tesoro to prove the unreasonableness of DOR's remedy.  There is contrary authority  



                                                                                                            

that indicates that if a taxing state invokes section 18 of the Multistate Tax Compact to  



                                                                                           

deviate from a prescribed tax statute, it bears the burden of proving the reasonableness  



          70        (...continued)  



                              (b) the exclusion of any one or more of the factors;  



                              (c)  the  inclusion  of  one  or  more  additional  factors  

                    which will fairly represent the taxpayer's business activity in  

                                                                                                 

                    this state; or  



                              (d) the employment of any other method to effectuate  

                                          

                    an equitable allocation and apportionment of the taxpayer's  

                    income.  



(Emphasis added.)  



          71  

                                                                                                        

                    Gulf Oil Corp. v. State, Dep't of Revenue, 755 P.2d 372, 381 (Alaska 1988).  

                                                                                         

As the United States Supreme Court has stated in applying the external consistency test:  

                                     

"The Constitution does not 'invalidate an apportionment formula whenever it may result  

                                                                                                                     

in taxation of some income that did not have its source in the taxing State.' "  Container  

                                                                          

Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 169-70 (1983) (quoting Moorman Mfg.  

                                         

Co. v. Bair, 437 U.S. 267, 272 (1978)) (emphasis in original) (internal quotation marks  

and alterations omitted).  



          72        See  Gulf  Oil  Corp.,  755  P.2d  at  381.    Tesoro  does  not  challenge  the  



                                                                                                                

reasonableness of DOR's conclusion that, given the Department of Law's 1999 opinion  

                                                                           

that AS 43.20.144(c) is constitutionally infirm as written, it was appropriate for DOR to  

invoke   its   authority   under   section   18   to   adopt   some   remedial   deviation   from  

AS 43.20.144(c).  



                                                              -31-                                                         6838
  


----------------------- Page 32-----------------------

                                        73  

     

of the proposed alternative.                We do not need to decide whether DOR had this burden,  



because even if DOR had the burden of proving the reasonableness of its proposed  



remedy, it met this burden.  



                   1.	       The property and sales factors were reasonable as applied to  

                             Tesoro.  



                   Courts have traditionally judged the reasonableness of an apportionment  



                                                                                                     74  

formula  by  applying  the  constitutional  test  of  external  consistency.                               The  external  



consistency test evaluates whether the tax "reflect[s] a reasonable sense of how [the  

taxpayer's] income is generated."75 Although the constitutional cases are not directly  



                                                     

relevant to the statutory question of whether a given formula meets the "if reasonable"  



test of section 18, they provide useful guidance in deciding this issue.   



                                                                     

                   During the contested years, DOR applied the three-factor property, sales,  



and extraction formula of AS 43.20.144(c)(3) to apportion Tesoro's income.  Tesoro  



argues  that  the  property  and  sales  factors  were  unreasonable  as  applied  to  it,  and  



advances three challenges to DOR's calculation of the property factor.   



                                                                                                   

                   First, Tesoro argues that because the R&M subsidiaries invested in massive  



infrastructure  in  Alaska,  while  the  E&P  subsidiaries'  out-of-state  property  holdings  



                                                                                   

consisted of leased land and partially owned equipment, the property factor overvalued  



                                                                                             

Tesoro's in-state activities.  Tesoro's argument seems to be that because it owned more  



                                                                                                            

property in Alaska than elsewhere, the property factor is distortive.   But the property  



                    

factor uses a taxpayer's in-state property as an estimate of the "protection, benefits, and  



          73       See, e.g.,  Microsoft Corp. v. Franchise Tax Bd. , 139 P.3d 1169, 1178 (Cal.  



2006).  



          74       See, e.g., Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 169  

                                                                                                    

(1983).  



          75       Id .  



                                                            -32-	                                                     6838
  


----------------------- Page 33-----------------------

services that the state furnishes to the enterprise and of the costs that the enterprise  

                                        76    As  DOR  observes,  Tesoro's  ownership  of  "massive  

                                                                                             

imposes  upon  the  state."  



infrastructure" in Alaska shows that it made greater use of state protections and benefits  

                                                                                    



in Alaska than in other areas where its property holdings were more modest.  There is  

                                                            



nothing distortive about attributing Tesoro's tax burden accordingly.  



                                                                 

                    Second,  Tesoro  argues  that  DOR's  calculation  of  the  property  factor  



                                                                         

unreasonably undervalued its out-of-state assets by calculating their value at cost and not  



                                                                                                                 

at fair market value.  As DOR points out, we have already considered and rejected this  



                                          

argument.  In Gulf Oil, we declined to value non-producing wells at their market value  



                                   77  

instead of at their cost.              We noted that if we valued one asset in the property factor  



                                                                                                 78  

calculation at market value, we would have to so value all assets.                                    We refused then to  

                                                                   



                                                     79  

assign DOR this "formidable task."                        Other courts considering this issue have reached  

                                                                                                 

                        80  Gulf Oil forecloses Tesoro's argument.  

the same result.     



                    Third,  Tesoro  argues  that  the  property  factor  was  distortive  because  it  



excluded  intangible  property  and  thus  excluded  a  valuable  contract  that  an  E&P  



subsidiary  owned  during  the  relevant  period.    Excluding  intangible  property  in  the  



                                                                            

calculation of the property factor is a practice that has been universally accepted across  



          76        1 JEROME R.  HELLERSTEIN &  WALTER HELLERSTEIN ,   STATE TAXATION    



8.06[2], at 8-67 (3d ed. 2012).  



          77        Gulf Oil Corp., 755 P.2d at 385-87.  



          78        Id . at 387.  



          79        Id .  



          80        See In re Colo. Interstate Gas Co., 79 P.3d 770, 786 (Kan. 2003).                                 See also  



Chase Brass & Copper Co. v. Franchise Tax Bd., 138 Cal. Rptr. 901, 911 (Cal. App.           

1977).  



                                                              -33-                                                         6838
  


----------------------- Page 34-----------------------

         81  

states.       Most courts have adhered to this general rule even if, as here, the taxpayer  



                                                                                             

asserts that the exclusion of a particularly valuable intangible asset causes unreasonable  



                                                  82  

                                                         We  are  unpersuaded  by  Tesoro's  argument  that  

distortion  of  the  property  factor.                               



DOR's adherence to this widely accepted practice was unreasonable.  



                    Tesoro   also   argues   that   DOR's   calculation   of   the   sales   factor   is  



unreasonable because it takes into account gross income and not net profits.  Tesoro  



                                                                                                    

contends that such a calculation overvalues its business activities in state relative to its  



activities out of state because its in-state businesses were high volume but low margin,  



                                                                                                           

while its out-of-state  businesses were  low  volume  but high  margin.    Again,  Tesoro  



quarrels  with  universally  accepted  taxing  practice.    Every  state  with  a  broad-based  



                                                                                                    

corporate income tax uses a gross sales or gross receipts factor in its apportionment  



             83 

                                                                                                                  

formula.         Furthermore, as DOR observes, the United States Supreme Court has rejected  



                                                                                                                                84  

                                                                                 

the argument that disparate profits across subsidiaries are indicative of unfair taxation. 



                    Regardless, formula apportionment is meant to measure "the corporation's  



          81        Walter Hellerstein, State Taxation of Corporate Income from Intangibles:   



Allied-Signal and Beyond, 48 TAX  L.  REV .  739, 779 (1993) ("No state, however, takes   

account of intangible property in the property factor of the standard three factor formula,  

which is limited to the taxpayer's real and tangible personal property.").  



          82        See, e.g., Random House, Inc. v. Comptroller of the Treasury , 531 A.2d  



683, 685-90 (Md. 1987); Disney Enter., Inc. v. Tax Appeals Tribunal of the State , 830  

                                                                                            

N.Y.S.2d 614, 617 (N.Y. App. Div. 2007), aff'd, 888 N.E.2d 1029 (N.Y. 2008).  But see  

                                                                                                    

Crocker Equip. Leasing, Inc. v. Dep't of Revenue, 838 P.2d 552, 557-58 (Or. 1992).  



          83        1 JEROME R.  HELLERSTEIN &  WALTER HELLERSTEIN ,   STATE TAXATION    



8.06[3], at 8-67 to 8-68 (3d ed. 2012); id. at  9.02, at 9-18 to 9-19 (3d ed. 2011).  



          84        Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 181 (1983).  



                                                              -34-                                                         6838
  


----------------------- Page 35-----------------------

                                                                      85  

                                                                                                            

activities within and without the jurisdiction."                           Tesoro's sales factor argument is built  



                                             

on the flawed premise that a business's in-state activities are only as great as the profits  



                                                                         

it generates from its in-state activities.  In fact, the sales factor is designed to attribute a  



                                                                                                                                   86  

                                                                               

taxpayer's income to the jurisdictions in which its goods and services are consumed. 



Tesoro admits that the R&M subsidiaries "sold a large volume of gasoline each day" as  

                                                                                                     



compared to E&P's "small-scale operation," which generated "far more modest" sales.  

                                                                                                



But  Tesoro  contends  that  we  should  ignore  the  relative  size  of  R&M's  business  

                                                                          



operations as compared to E&P's and instead focus on the relative size of the net income  

                      



generated by these operations.  We reject Tesoro's argument because we conclude that  

                                                                                               



a business's in-state activities may be fairly measured by the amount of goods or services  



                                                                         

that consumers purchase in state regardless of whether the business later turns a profit  



or loss on those purchases.  



                                       

                     In  support  of  its  position  that  profits  and  not  sales  should  be  used  to  



                                                                                                                       

measure in-state business activities, Tesoro cites cases in which other courts have held  



                                                                                                                  

that taxing states could vary their apportionment formulas to account for the distortion  



                                                                                 

caused by including in the sales factor gross sales generated by a corporate treasury  



                                                                    87  

                                                                         This body of case law is distinguishable  

department's short-term investment receipts.                                                               



for  two reasons.  First, in the cited cases, distortion resulted because the short-term  



investments served no operational function and were thus qualitatively different from the  

                                                     



          85        Id . at 165.  



          86         1 JEROME R.  HELLERSTEIN &  WALTER HELLERSTEIN ,   STATE TAXATION    



8.06[3], at 8-68 (3d ed. 2012).  



          87        See  Microsoft  Corp.  v.  Franchise  Tax  Bd.,  139   P.3d   1169,  1180  (Cal.  



2006); Am. Tel. & Tel. Co. v. State Tax Appeal Bd. , 787 P.2d 754, 757 (Mont. 1990);   

Sherwin-Williams Co. v. Johnson, 989 S.W.2d 710, 712 (Tenn. App. 1998).   



                                                               -35-                                                          6838
  


----------------------- Page 36-----------------------

companies' other business activities.88  There is no risk of similar distortion here because  

                                                                                                 



R&M was an operational segment; its sales therefore could reasonably be compared to  

                                                                                                



those of Tesoro's other major operational segment, E&P.  Second, in the cases Tesoro  

                                                                                                                        



cites  no  court  held  that  an  adjustment  was  required;  the  courts  held  instead  that  an  

                                                                               89   Tesoro cites no authority for its position  

adjustment was constitutionally permissible .     



that because one of Tesoro's operational segments was less profitable than the others the  

                                                    



sales factor is unreasonably distortive.  



                        2.          The overall formula was reasonable as applied to Tesoro.  



                        Tesoro argues that unreasonable distortion can be seen in the disparity  



between the income subject to taxation under the section 18 remedial formula and the  

                                                                                                                              



income that would be subject to taxation under separate accounting.  Tesoro asserts that  

                                                                                                                          



because DOR taxed $89 million in income whereas under separate accounting it would  

                                                                                             



have taxed only $14 million in income, DOR taxed $75 million that was "unquestionably  

                                                       



generated" outside Alaska.  



                        Tesoro  mistakenly  assumes  that  it  is  possible  to  determine  where  the  



income of a unitary business is "unquestionably generated."  In  Container Corp., the  



United States Supreme Court stated that the "basic theoretical weakness" of separate  



                                                                         

accounting is that for a unitary business it is "misleading to characterize the income of  



            88          See Microsoft Corp.                 , 139 P.3d at 1180 (limiting holding to circumstances   



in  which  sales  factor  would  otherwise  include  income  from  "corporate  treasury  

departments whose operations are qualitatively different from the rest of a corporation's  

                                                                                                                            

business").  



            89          See id. at 1178-79; Am. Tel. & Tel. Co. , 787 P.2d at 757; Sherwin-Williams  



Co., 989 S.W.2d at 716.  



                                                                         -36-                                                                    6838
  


----------------------- Page 37-----------------------

                                                                                90  

the business as having a single identifiable 'source.' "                            Tesoro cites the United States  

Supreme Court's 1931 decision in Hans Rees' Sons, Inc. v. North Carolina91 for the  



                                                                                                       

proposition that a state's apportionment should be struck down if the taxpayer is able to  



show a large disparity between the income taxed under separate accounting and the  



                                                                                                        

income taxed under the state's apportionment formula.  But the Hans Rees' Sons Court  



never explicitly held this, and in the years since it decided that case the United States  



Supreme Court has declined to hold formula apportionment unreasonable even when  



                                                                                      

presented with a large disparity between the income that would have been taxed under  



                                                 

separate       accounting         and     the     income       that     was     actually      taxed      under      formula  



                       92  

apportionment.               We  also  reject  the  argument  that  such  a  disparity,  without  more,  



renders an apportionment unreasonable.  



                                                                                            

          C.	       The Administrative Law Judge Did Not Err In Finding Penalties To  

                    Be Permissible In This Case.  



                    DOR's  September  21,  2001  assessment  imposed  failure-to-pay  and  



                                                                               

negligence penalties against Tesoro.  Relying on the 1999 Attorney General's Opinion  



                                                                                 

that AS 43.20.144's tax scheme was unconstitutional, Tesoro argues that as a matter of  



law   it   cannot   be   penalized   for   failing   to   pay   taxes   under   an   unconstitutional  



                                                                                                     

apportionment scheme.  We are unpersuaded for two reasons. First, as the United States  



          90        Container Corp. of Am. v. Franchise Tax Bd.                         , 463 U.S. 159, 181 (1983)  



(quoting Mobil Oil Corp. v. Comm'r of Taxes , 445 U.S. 425, 438 (1980)).  



          91	       283 U.S. 123 (1931).  



          92  

                                                             

                    See Trinova Corp. v. Mich. Dep't of Treasury, 498 U.S. 358, 368-70 & n.8  

(1991)   (holding   taxable   income   of   $221,125,319   under   formula   apportionment  

constitutional even when compared to taxable income of -$28,493,861 under separate  

                                                           

accounting); Butler  Bros.  v.  McColgan ,  315  U.S.  501,  505  (1942)  (holding  taxable  

                                                                                            

income of $1,149,677 under formula apportionment constitutional even when compared  

                 

to a taxable income of -$82,851 under separate accounting).  



                                                             -37-	                                                       6838
  


----------------------- Page 38-----------------------

Supreme Court has held, a state may require, under threat of penalty, that a taxpayer pay  

                                                                      



                                       93  

a tax before contesting it.                 Second, DOR did not assess the penalties because Tesoro  



                              

failed to acquiesce in AS 43.20.144's apportionment scheme, but because Tesoro failed  



to acknowledge that KPL was unitary with R&M.  



                     Tesoro repeatedly took the position that its Alaskan refinery was not unitary  



                                                                                                                            94 

                                                                                                                                and  

with the Alaskan pipeline that fed it, despite the obvious invalidity of this position 



                                                                                              

despite DOR's October 1, 1998 determination that KPL and R&M were unitary.  DOR  



there found that "Tesoro is one unitary petroleum business" and that "the entire group  



                                                                                              

is subject to modified apportionment under AS 43.20.072."  Notwithstanding that 1998  



finding, Tesoro not only failed to amend its filings for the years 1994-1997 to reflect its  



                                            

unitary business, but it also thereafter filed its 1998 tax return as if KPL were a wholly  



                                 

separate enterprise.  DOR's September 18, 2001 assessment imposed penalties against  



                                                                                        

Tesoro  for  failing  to  amend  its  1995-1997  filings  and  for  again  asserting  the  same,  



                                                                              

invalid position in its 1998 return.  It was not until June 2005 - almost four years after  



the penalties were assessed and more than six years after the 1998 determination -  that  



                                                                                                       

Tesoro amended its filings to reflect DOR's 1998 unitary finding.  Tesoro's unjustified  



                                                                                             

position would have warranted penalties regardless of what apportionment scheme was  



ultimately applied to it.  DOR permissibly assessed the penalties.  



          93        See, e.g., McKesson Corp. v. Div. of Alcoholic Beverages & Tobacco, Dep't  



of Bus. Regulation of Fla., 496 U.S. 18, 51 (1990); see also AS 43.05.242(g) (requiring  

                                                 

payment of tax by litigant disputing tax).  



          94        See 1 JEROME R. HELLERSTEIN &  WALTER HELLERSTEIN , STATE TAXATION  



 8.08[2][a][i], at 8-102 (3d ed. 2012) ("[A]n integrated oil company is the quintessential       

unitary business.").  



                                                               -38-                                                          6838
  


----------------------- Page 39-----------------------

V.     CONCLUSION  



              For these reasons, we AFFIRM the superior court's decision that affirmed  



the administrative law judge's award of taxes, interest, and penalties.  



                                           -39-                                     6838
  

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