Amerada Hess Corporation v. Director, Division of Taxation, New Jersey Department of the Treasury

PETITIONER: Amerada Hess Corporation
RESPONDENT: Director, Division of Taxation, New Jersey Department of the Treasury
LOCATION: Washington, D.C.

DOCKET NO.: 87-453
DECIDED BY: Rehnquist Court (1988-1990)
LOWER COURT: New Jersey Supreme Court

CITATION: 490 US 66 (1989)
ARGUED: Nov 29, 1988
DECIDED: Apr 03, 1989

Mark L. Evans - on behalf of the Appellants
Mary R. Hamill - on behalf of the Appellee

Facts of the case


Media for Amerada Hess Corporation v. Director, Division of Taxation, New Jersey Department of the Treasury

Audio Transcription for Oral Argument - November 29, 1988 in Amerada Hess Corporation v. Director, Division of Taxation, New Jersey Department of the Treasury

William H. Rehnquist:

We will hear argument next in No. 87-453, Amerada Hess v. the Director of the Division of Taxation; and No. 87-464 Texaco v. the Director.

Mr. Evans, you may proceed whenever you're ready.

Mark L. Evans:

Thank you, Mr. Chief Justice, and may it please the Court:

These appeals are about New Jersey's novel attempt to raise its own state tax revenues at the expense of only out-of-state economic interests.

Most of the paths to that tempting goal have been shut off over the years by this Court's decisions which have made it crystal clear that while interstate business must bear its fair share of local tax burdens, it must be made to bear no more than its fair share.

But New Jersey seems to feel it has found a loophole.

Under the formula apportionment method of taxation, a state first determines the total income from the entire enterprise from sources both inside and outside the state and then takes a slice of that income for itself by using a fair apportionment formula.

The Court's decisions have insisted that the formula be geographically neutral so that the state does not impute to itself a greater portion of total net income than can be reasonably attributed to the company's activities within the state.

What New Jersey has done is used a perfectly reasonable apportionment formula, but it has applied it to a geographically skewed base.

It has not skewed the base by adding out-of-state revenues to it in an inappropriate way or overstating out-of-state revenues; what it has done is found a cost that is incurred only outside the state, only by crude oil producers, and has disallowed it.

The result of that has been to drastically raise the income that New Jersey taxes from the oil companies.

And the question that is raised, in our view, by this is whether a state can sidestep the usual apportionment mechanisms on the theory that income tax deductions are purely a matter of legislative grace.

I'd like, if I may, to start with describing a little bit of the context in which this case arises.

The Appellants are all integrated interstate petroleum companies.

They do business in New Jersey, but they produce crude oil only outside New Jersey.

There is no crude oil produced at all in New Jersey.

During the years at issue each of the companies incurred very substantial windfall profit tax liabilities.

That tax operates much as a severance tax does: it is imposed on the removal of each barrel of crude oil from the producing premises, and it is measured by a portion of the barrel's wellhead value.

Under New Jersey's formula apportionment method, it requires the Appellants to include in their preapportionment base all of their income from all sources.

That means that the base includes the income from, derived from the production activities outside the state.

At the same time, New Jersey law, as construed by the state Supreme Court, disallows a deduction for these billions of dollars of windfall profit taxes that Appellants incurred solely in the course of those out-of-state production activities.

The New Jersey allow the Appellants to deduct their federal income tax?

Mark L. Evans:

No, it does not.

Do you claim that is a violation of any constitutional principle?

Mark L. Evans:

No, we do not, Mr. Chief Justice.

The distinction, as I hope to develop a little bit further in a moment, is that the activities that give rise to the federal income tax liability are activities that take place everywhere, including New Jersey, and as a consequence, the cost of federal income taxes is not site-specific and geographically localized to any specific activity.

May I ask you a question, too, Mr. Evans?

Mark L. Evans:


Before you get... what is the allocation factor that New Jersey applies after they use their three factor formula to your company?

Mark L. Evans:

Well, there actually are, there are 13 companies involved.