(Handlery).) There are two possible methods for unitary corporate taxpayers to compute
2 Because this issue arises from the trial court's sustaining of the Board's demurrer, we must assume the truth of the properly pleaded factual allegations, facts that reasonably can be inferred from those expressly pleaded, and matters of which judicial notice has been taken. (Schifando v. City of Los Angeles (2003) 31 Cal.4th 1074, 1081.) 3
their California tax liability: the separate accounting method and the combined reporting
method. "[S]eparate accounting treats each corporate entity discretely for the purpose of
determining income tax liability." (Barclays Bank PLC v. Franchise Tax Bd. of Cal.
(1994) 512 U.S. 298, 305 (Barclays).) The combined reporting method aggregates the
entire amount of business income of all corporations in the unitary group. (Cal.
Franchise Tax Bd., Pub. No. 1061 (2000).)3
Taxpayers engaged in a unitary business within and without California—interstate
taxpayers—are required to use the combined reporting method. (§ 25101; Handlery,
supra, 26 Cal.App.3d at p. 973 ["In the case of a 'unitary business' the enterprise files a
combined report, and the income from its operations within the state is determined by a
formula."].) Handlery confirmed that taxpayers engaged in a unitary business wholly
within California—intrastate taxpayers—were required to use the separate accounting
method. (Handlery, at p. 985.) In response to Handlery, the Legislature in 1980 enacted
section 25101.15, which permits intrastate unitary groups to choose between the
combined reporting and separate accounting methods.4 Thus, as the Board summarizes
3 We grant Harley-Davidson's unopposed motion requesting that we take judicial notice of certain Board publications and a report commissioned by the National Conference of State Legislatures, Task Force on State & Local Taxation. (Ordlock v. Franchise Tax Bd. (2006) 38 Cal.4th 897, 912, fn. 8 [taking judicial notice of Board publications]; In re Crockett (2008) 159 Cal.App.4th 751, 762 [taking judicial notice of Council of State Government's Web site].)
4 Section 25101.15 provides as follows: "If the income of two or more taxpayers is derived solely from sources within this state and their business activities are such that if conducted within and without this state a combined report would be required to determine their business income derived from sources within this state, then such 4
in its respondent's brief, "section 25101.15 provide[s] wholly in-state businesses . . . an
election to file their returns on either a unitary combined reporting basis, or a separate-
entity basis. [¶] Multistate unitary businesses have no corresponding election." (Fn.
omitted.)
Harley-Davidson, through various subsidiaries, engages in two business lines: a
motorcycle business and a financial services business. For the Years at Issue, Harley-
Davidson reported the income of the motorcycle business but not the financial services
business, reasoning the latter was not unitary with the former. Following an audit of
Harley-Davidson's combined returns, the Board determined the financial services
business was, in fact, unitary with the motorcycle business. Consequently, the Board
notified Harley-Davidson that it intended to assess additional taxes for the Years at Issue.
Harley-Davidson unsuccessfully protested the Board's determination and provisionally
paid more than $1.8 million in additional taxes.
Harley-Davidson then sued the Board to recover a refund in the amount of its
additional provisional payment. In the first cause of action of its operative first amended
verified complaint (complaint), Harley-Davidson alleged the differential treatment
afforded to intrastate and interstate unitary businesses regarding the available methods for
computing tax liability violates the commerce clause of the United States Constitution
because it "confers benefits on intrastate unitary taxpayers that are not available
to . . . interstate unitary taxpayers and that operate as burdens on . . . interstate unitary
taxpayers shall be allowed to determine their business income in accordance with Section 25101." 5
taxpayers." The complaint cited (among others) the following benefits and burdens:
"[t]he option to file on the basis of the separate reporting method allows intrastate unitary
taxpayers . . . the ability to more efficiently use credits and net operating losses, reduced
tax burden, increased administrative ease and lower compliance costs in preparing
returns . . . ."
The Board demurred to the first cause of action and the trial court sustained the
demurrer without leave to amend. Harley-Davidson timely appealed.
B. Standard of Review
The constitutionality of California's corporate taxation scheme at issue is a
question of law that we review de novo. (Cutler v. Franchise Tax Bd. (2012) 208
Cal.App.4th 1247, 1253 (Cutler).) Additionally, "[o]n review from an order sustaining a
demurrer, 'we examine the complaint de novo to determine whether it alleges facts
sufficient to state a cause of action under any legal theory . . . .' " (Committee for Green
Foothills v. Santa Clara County Bd. of Supervisors (2010) 48 Cal.4th 32, 42.)
C. Commerce Clause Overview
The commerce clause provides that "[t]he Congress shall have Power . . . [¶] [t]o
regulate Commerce . . . among the several States." (U.S. Const., art. I, § 8, cl. 3.)
"Though phrased as a grant of regulatory power to Congress, the [c]lause has long been
understood to have a 'negative' aspect that denies the [s]tates the power unjustifiably to
discriminate against or burden the interstate flow of articles of commerce." (Oregon
Waste, supra, 511 U.S. at p. 98.) In this negative, or dormant, aspect, "the [c]ommerce
[c]lause 'prohibits economic protectionism -- that is, "regulatory measures designed to
Corp. v. Faulkner (1996) 516 U.S. 325, 330 (Fulton); Bacchus Imports v. Dias (1984)
468 U.S. 263, 268 ["A cardinal rule of [c]ommerce [c]lause jurisprudence is that '[no]
[s]tate, consistent with the [c]ommerce [c]lause, may "impose a tax which discriminates
against interstate commerce . . . by providing a direct commercial advantage to local
business." ' "].) "This reading effectuates the Framers' purpose to 'prevent a [s]tate from
retreating into economic isolation or jeopardizing the welfare of the Nation as a whole, as
it would do if it were free to place burdens on the flow of commerce across its borders
that commerce wholly within those borders would not bear.' " (Fulton, at pp. 330-331.)
"[T]he first step in analyzing any law subject to judicial scrutiny under the
negative [c]ommerce [c]lause is to determine whether it 'regulates evenhandedly with
only "incidental" effects on interstate commerce, or discriminates against interstate
commerce.' " (Oregon Waste, supra, 511 U.S. at p. 99.) In this context, " 'discrimination'
simply means differential treatment of in-state and out-of-state economic interests that
benefits the former and burdens the latter." (Ibid.) "By contrast, nondiscriminatory
regulations that have only incidental effects on interstate commerce are valid unless 'the
burden imposed on such commerce is clearly excessive in relation to the putative local
benefits.' " (Ibid.)5 Whether the "discrimination comes in the form of a deprivation of a
5 That said, there is no " 'de minimis' defense to a charge of discriminatory taxation under the [c]ommerce [c]lause." (Fulton, supra, 516 U.S. at p. 333, fn. 3; Oregon Waste, supra, 511 U.S. at p. 100, fn. 4 [recognizing that United States Supreme Court precedents "clearly establish that the degree of a differential burden or charge on interstate 7
generally available tax benefit, rather than a specific penalty on the [interstate] activity
itself, is of no moment." (Camps Newfound/Owatonna, Inc. v. Town of Harrison (1997)
520 U.S. 564, 578-579.)
"If a restriction on commerce is discriminatory, it is virtually per se invalid,"
(Oregon Waste, supra, 511 U.S. at p. 99) unless the "justifications for discriminatory
restrictions on commerce pass the 'strictest scrutiny' " (id. at p. 101; South Central Bell
Telephone Co. v. Alabama (1999) 526 U.S. 160, 169 (South Central Bell)). Accordingly,
a discriminatory regulation must be invalidated unless its proponent can " 'show that it
advances a legitimate local purpose that cannot be adequately served by reasonable
nondiscriminatory alternatives.' " (Oregon Waste, at pp. 100-101.)6
D. Analysis
In applying the commerce clause precedents just discussed, we must determine
whether (1) the relevant aspect of California's tax scheme treats intrastate and interstate
unitary businesses differently, (2) any differential treatment discriminates against
interstate commerce either by benefiting intrastate businesses or burdening interstate
commerce 'measures only the extent of the discrimination' and 'is of no relevance to the determination whether a [s]tate has discriminated against interstate commerce' "].)
6 A discriminatory tax may also withstand commerce clause scrutiny if it is a "compensatory" or "complementary" tax—that is, "a facially discriminatory tax that imposes on interstate commerce the rough equivalent of an identifiable and 'substantially similar' tax on intrastate commerce." (Oregon Waste, supra, 511 U.S. at pp. 102-103; Fulton, supra, 516 U.S. at p. 331 ["a facially discriminatory tax may still survive [c]ommerce [c]lause scrutiny if it is . . . 'designed simply to make interstate commerce bear a burden already borne by intrastate commerce' "].) The Board does not contend this exception applies. 8
businesses, and (3) any discriminatory differential treatment withstands strict scrutiny.
(Oregon Waste, supra, 511 U.S. at pp. 99-101.)
1. Differential Treatment
The Board effectively concedes in its briefing that the differential-treatment prong
is satisfied, acknowledging that "section 25101.15 provides[s] wholly in-state
businesses . . . an election to file their returns on either a unitary combined reporting
basis, or a separate-entity basis," while "[m]ultistate unitary businesses have no
corresponding election."
2. Discrimination
Many federal, California, and out-of-state cases have concluded that analogous
regulatory and tax schemes impermissibly discriminate against interstate commerce. In
Fulton, the United States Supreme Court examined North Carolina's " 'intangibles tax,' "
which imposed a .25 percent tax on the fair market value of corporate stock owned by
North Carolina taxpayers. (Fulton, supra, 516 U.S. at p. 327.) The offending portion of
the tax scheme was a corresponding "taxable percentage deduction equal to the fraction
of the issuing corporation's income subject to tax in North Carolina." (Id. at pp. 327-
328.) "Thus, a corporation doing all of its business within the [s]tate would pay corporate
income tax on 100[ percent] of its income, and the taxable percentage deduction allowed
to resident owners of that corporation's stock under the intangibles tax would likewise be
100[ percent]. Stock in a corporation doing no business in North Carolina, on the other
hand, would be taxable on 100[ percent] of its value." (Id. at p. 328.) This differential
9
treatment led the court to conclude "[t]here is no doubt that the intangibles tax facially
discriminates against interstate commerce." (Id. at p. 333.)
In South Central Bell, the United States Supreme Court invalidated Alabama's
franchise tax scheme, which allowed domestic corporations to pay a franchise tax based
on the par value of the firm's stock—a value the firm could set well below its book or
market value—but required foreign corporations to base their tax on " 'the actual amount
of capital employed' in Alabama." (South Central Bell, supra, 526 U.S. 160 at pp. 162,
169.) It was undisputed that although domestic corporations paid tax at a rate of 1
percent of par value while foreign corporations paid at a rate of only .3 percent of their
actual capital, domestic corporations paid, on average, only one-fifth the amount they
would have paid if they had been taxed as foreign corporations. (Id. at pp. 162, 169.)
The court concluded that "giv[ing] domestic corporations the ability to reduce their
franchise tax liability simply by reducing the par value of their stock, while [denying]
foreign corporations that same ability," constituted discrimination under the commerce
clause. (Id. at p. 169.)
Turning to California authorities, in Cutler, the Court of Appeal invalidated
section 18152.5, which allowed "an individual California taxpayer to defer capital gains
on the sale of stock in a qualified small business if the taxpayer used the gain to purchase
stock in another qualified small business. The deferral was available, however, only if
the stock sold and purchased was issued by corporations that used 80 percent of their
assets in the conduct of business in California and that maintained 80 percent of their
payrolls in California." (Cutler, supra, 208 Cal.App.4th at p. 1250.) The court stated it
10
was bound by Fulton, supra, 516 U.S. at page 330 to "conclude that, because the statute
affords taxpayers a deferral for income received from the sale of stock in corporations
maintaining assets and payroll in California, while no deferral is afforded for income
from the sale of stock in corporations that maintain assets and payroll elsewhere, the
deferral provision discriminates on its face on the basis of an interstate element in
violation of the commerce clause." (Cutler, at p. 1250.)
In Ceridian Corp. v. Franchise Tax Bd. (2000) 85 Cal.App.4th 875 (Ceridian), the
Court of Appeal invalidated former section 24410, which provided a corporate tax
deduction for dividends paid to the corporation from the corporation's insurance company
subsidiaries because the deduction was limited to dividends paid from income from
California sources. (Ceridian, at p. 883.) In considering the discriminatory effect of the
statute, the court observed: "a statutory scheme . . . that disallows a deduction based on
the amount of property and employees that the dividend-declaring insurer has in another
state, favors domestic corporations over their foreign competitors in raising capital
among California corporations, and tends, at least, to discourage domestic corporations
from plying their trade in interstate commerce, from purchasing property or hiring
employees in other states, and from purchasing subsidiary insurance corporations that do
so." (Id. at p. 887.) Thus, the court concluded the geographic limitation on the dividend
deduction was "unquestionably discriminatory on its face." (Ibid.)
In Farmer Bros. Co. v. Franchise Tax Bd. (2003) 108 Cal.App.4th 976, the Court
of Appeal examined former section 24402, which "afford[ed] to a corporate taxpayer an
income tax deduction for a portion of the dividends it receives from another corporation
11
when the dividends are declared from income which was included in the payer
corporation's measure of California franchise tax, alternative minimum tax, or
corporation income tax." (Farmer Bros. Co., at p. 980.) Following Ceridian, the court
"conclude[d] that section 24402 is discriminatory on its face because it affords to
taxpayers a deduction for dividends received from corporations subject to tax in
California, while no deduction is afforded for dividends received from corporations not
subject to tax in California. As a result, the dividends received deduction scheme favors
dividend-paying corporations doing business in California and paying California taxes
over dividend-paying corporations which do not do business in California and pay no
taxes in California. The deduction thus discriminates between transactions on the basis
of an interstate element, which is facially discriminatory under the commerce clause."
(Farmer Bros. Co., at pp. 986-987.)
Harley-Davidson directs us to General Motors Corp. v. Director of Revenue (Mo.
1998) 981 S.W.2d 561 (General Motors), a decision in which the Supreme Court of
Missouri concluded a Missouri tax scheme similar to the one before us impermissibly
discriminated against interstate commerce. The statute at issue in General Motors
allowed affiliated groups of corporations to file a consolidated state income tax return
only if 50 percent or more of its income was derived from sources within Missouri. (Id.
at p. 563.) It was undisputed in General Motors that allowing an affiliated group to file a
consolidated state tax return could result in tax and administrative benefits for the group.
(Ibid.) Based on many of the same United States Supreme Court precedents discussed
above, the Missouri court concluded that because the benefits of filing a consolidated tax
12
return were only available to "business groups that perform the majority of their business
activities in Missouri" (ibid.), the statute's 50-percent threshold "facially discriminates
against interstate commerce" (id. at pp. 565-566).
A reading of the foregoing cases leads to the unavoidable conclusion that
California's statutory scheme for determining how unitary businesses compute their
California tax liability "discriminates on its face on the basis of an interstate element in
violation of the commerce clause." (Cutler, supra, 208 Cal.App.4th at p. 1250.) That is,
whether a unitary business computes its California tax liability using the separate
accounting method or the combined reporting method is determined solely by where the
unitary business engages in commerce.
We find the Board's attempts to distinguish the commerce clause precedents
unpersuasive. For example, whether a statute imposes a 50-percent (as in General
Motors), 80-percent (as in Cutler), or 100-percent (as here) in-state commerce threshold
does not determine whether a tax scheme discriminates—it only determines how much it
discriminates. (Oregon Waste, supra, 511 U.S. at p. 99, fn. 4 ["the degree of a
differential burden or charge on interstate commerce 'measures only the extent of the
discrimination' and 'is of no relevance to the determination whether a [s]tate has
discriminated against interstate commerce' "].) Nor does the Board cite any authority that
would support the proposition that the commerce clause can only invalidate a single
statute or deduction and not "California's entire tax scheme of requiring multistate unitary
businesses to use combined reports." Indeed, we question the wisdom of a rule that
13
would allow a state to circumvent the commerce clause simply by accomplishing with
two statutes what it otherwise could have accomplished with one.
The Board also argues this case is controlled by a different line of authorities that
has upheld California's method of apportioning unitary interstate businesses' California
tax liability. Those cases arise from the premise that "[u]nder both the [d]ue [p]rocess
and the [c]ommerce [c]lauses of the Constitution, a [s]tate may not, when imposing an
income-based tax, 'tax value earned outside its borders.' " (Container Corp. v. Franchise
Tax Bd. (1983) 463 U.S. 159, 164; Barclays, supra, 512 U.S. 298.) However, those cases
are not controlling—or relevant—because they only considered the constitutionality of
California's apportionment scheme in isolation, not in the context of differential
treatment. (Westinghouse Electric Corp. v. Tully (1984) 466 U.S. 388, 399 [" 'Fairly
apportioned' and 'nondiscriminatory' are not synonymous terms."]; General Motors,
supra, 981 S.W.2d at p. 567 ["A determination that a state's method of apportionment is
constitutionally sound does not foreclose a determination of whether the state's tax
scheme discriminates against interstate commerce."]; Ceridian, supra, 85 Cal.App.4th at
p. 884 ["none of the cases cited by the Board concerned a commerce clause challenge"].)
Ultimately, the Board concedes the inapplicability of this alternate line of cases when it
acknowledges in its briefing that "neither the Supreme Court of the United States nor the
Supreme Court of California have explicitly addressed the question of whether requiring
multistate businesses to file by combined report/formula apportionment, while allowing
in-state businesses to file on separate entity returns discriminates in violation of the
commerce clause . . . ."
14
The Board also argues that any differential treatment is not discriminatory because
it neither benefits intrastate businesses nor burdens interstate ones.7 We must reject this
argument, however, because Harley-Davidson's complaint alleges the existence of those
benefits and burdens and we accept that allegation as true in the context of reviewing an
order sustaining a demurrer.8 (Schifando v. City of Los Angeles, supra, 31 Cal.4th at
p. 1081.)
The Board attempts to rationalize the taxation scheme's discriminatory treatment
of interstate businesses by characterizing it as an attempt to "level the field" between
intrastate and interstate businesses. As mentioned above, intrastate unitary businesses
historically were limited to use of the separate accounting method, which they contended
put them at a disadvantage vis-á-vis interstate unitary businesses that used combined
reporting. According to the Board, all that section 25101.15 did was eliminate that
disadvantage by giving intrastate businesses the option of also using combined reporting.
But by giving intrastate businesses the right to choose between two methods while
restricting interstate unitary businesses to one, section 25101.15 tipped the playing
field—at least superficially—in favor of intrastate businesses. In any event, this
argument is unavailing because the state's intent, no matter how noble, cannot justify a
7 Indeed, the Board goes one step further by suggesting "[a]ny . . . differential treatment is actually reduced by section 25101.15 because every time an in-state business opts to use it, that business is treated the same as a multistate business and is required to file utilizing the unitary combined report method."
8 In addition, Harley-Davidson's opening brief elaborates on certain of the benefits and burdens alleged in the complaint and provides at least two detailed examples. 15
commerce clause violation. (Oregon Waste, supra, 511 U.S. at p. 100 ["the purpose of,
or justification for, a law has no bearing on whether it is facially discriminatory"];
Ceridian, supra, 85 Cal.App.4th at p. 886 ["The fact that the tax scheme may serve some
other laudatory purpose does not save it from a commerce clause challenge."].)
In summary, Harley-Davidson has sufficiently alleged for purposes of surviving
the Board's demurrer that the differential treatment of intrastate and interstate unitary
businesses is discriminatory within the meaning ascribed by commerce clause precedent.
3. Strict Scrutiny
The Board contends that even if the taxation scheme's differential treatment
discriminates against interstate commerce, it nonetheless passes strict scrutiny because
the state has offered a legitimate reason to impose the discriminatory treatment:
"[a]llowing multistate unitary businesses to file on a separate basis is subject to
manipulation, and does not accurately reflect in-state income and values attributable to
that business in ways that do not exist for in-state businesses," thus "depriv[ing]
California of much needed tax revenue." Harley-Davidson counters that the Board has
confused both the facts and the law. Regarding the facts, Harley-Davidson asserts that
the manipulation and inaccuracy of which the Board complains arise from "separate
geographical accounting," not the "separate company reporting" that is at issue here. As
for the law, even assuming the Board identified a legitimate local purpose, Harley-
Davidson contends the Board ignored the second strict-scrutiny prong, which requires
that the scheme's legitimate local purpose be incapable of being " 'adequately served by
reasonable nondiscriminatory alternatives.' " (Oregon Waste, supra, 511 U.S. at pp. 100-
16
101.) Harley-Davidson asserts the Board fails this prong because other,
nondiscriminatory statutes directly address the Board's concerns regarding manipulation
and accuracy.9
The Board has raised this issue for the first time on appeal. And because this
appeal arises from an order sustaining a demurrer, the record is undeveloped with respect
to whether the Board has identified a legitimate reason for differentiating between and
discriminating against intrastate and interstate unitary businesses and, if so, whether that
legitimate reason can be " 'adequately served by reasonable nondiscriminatory
alternatives.' " (Oregon Waste, supra, 511 U.S. at pp. 100-101.) Accordingly, we
remand for the trial court to make these determinations in the first instance.
II.
WHETHER THE SUBSIDIARIES HAVE A TAXABLE NEXUS
Harley-Davidson contends the trial court erred by finding two of its subsidiaries
bore a nexus with California sufficient to subject them to taxation here. Harley-Davidson
first challenges the sufficiency of the evidence supporting the trial court's factual findings
that the subsidiaries' affiliates were the subsidiaries' agents. Harley-Davidson then
challenges the legal significance of those findings, contending the trial court erred by
9 Harley-Davidson cites as examples section 25102, which authorizes the Board to recompute a taxpayer's income to "reflect the proper income"; section 25103, which authorizes the Board to require a corporate taxpayer to report facts related to transactions at less than fair value to "prevent evasion of taxes or clearly to reflect the income of such corporation"; and section 25104, which authorizes the Board to require a consolidated report as it deems necessary and further empowers the Board to assess additional tax in order "to prevent evasion of taxes or to clearly reflect the net income earned by said corporation . . . from business done in this [s]tate." 17
concluding the agents' actions were sufficient to establish a nexus on behalf of the
subsidiaries. We disagree in both respects.
A. Factual and Procedural Background10
This issue concerns two of Harley-Davidson's financial services subsidiaries:
Harley-Davidson Customer Funding Corp. (HDCF) and Eaglemark Customer Funding
Corp. IV (FUND4) (together, the special purpose entities or SPEs). To explain the SPEs'
context within the Harley-Davidson corporate family, we must describe generally Harley-
Davidson's overall business model.
1. General Background
Harley-Davidson's motorcycle business manufactured motorcycles, and
manufactured or purchased for resale motorcycle parts, accessories, and related
merchandise. Headquartered in Milwaukee, Wisconsin, it had manufacturing and
distribution facilities in various states, but none in California. One legal entity in the
motorcycle business had a small office in California where it performed design and
marketing services. The motorcycle business did not operate any retail stores; rather, it
sold its products at wholesale to unrelated dealers in the United States who resold to retail
customers. There is no dispute regarding the motorcycle business's nexus.
The financial services business, consisting of Harley-Davidson Financial Services,
Inc. (HDFS) and its subsidiaries, engaged in financing and insurance. HDFS was a
holding company that provided administrative services—such as executive leadership,
finance/accounting/tax, legal, human resources and information technology—to its
10 All facts relate to the Years at Issue unless otherwise noted. 18
subsidiaries. HDFS was based in Chicago, Illinois, where most of its employees were
located. HDFS also employed regional managers who worked from home and were
responsible for educating dealers on the finance and insurance products offered by
HDFS's subsidiaries. There is no dispute regarding HDFS's nexus.
2. Financing Motorcycle Purchases
Many purchasers of Harley-Davidson motorcycles chose to purchase with credit.
They were not obligated to obtain credit through Harley-Davidson. From January 2000
through July 2002, independently owned Harley-Davidson dealers extended credit
directly to some customers via a finance contract. Beginning in August 2002, a Harley-
Davidson-affiliated bank extended loans directly to some purchasers. In 2002, the bank
and its 49 employees were located exclusively in Nevada; it had no offices, agents,
employees, or property in California. Generally, neither the dealers nor the bank held the
finance contracts or loans (together, loans) they originated. Instead, they sold the loans to
another wholly owned HDFS subsidiary, Harley-Davidson Credit Corporation (HDCC).
3. HDCC
HDCC's offices were located in Nevada, Illinois, and Texas; it had no property in
California and none of its 300-plus employees were based here. As servicer of the loans,
if payments on a loan were not made timely or fully, HDCC employees based in Nevada
performed collection activities. If collection efforts were not successful, HDCC hired
third-parties to repossess the motorcycles securing the loans. Some repossessed
motorcycles ended up at auction houses. An HDCC employee visited an auction house in
19
California on 17 days total to assist in setting prices for motorcycles or to observe some
part of the auction process.
HDCC also made wholesale loans to Harley-Davidson dealers for their purchases
of inventory and for upgrades to their showrooms.
4. Securitizing and Servicing Loan Pools
To generate liquidity, HDCC securitized a portion of the consumer loans it
purchased. Approximately two to three times per year, HDCC identified and sold a pool
of loans to either of the SPEs, which were wholly owned subsidiaries of HDCC. The sale
of loans included a security interest that permitted repossession of the underlying
motorcycles.
HDCC chose the loans for the pools using a rigorous analytical process that
evaluated the substance of each loan and the creditworthiness of each borrower to gauge
the likelihood of being repaid timely and in full. The pools included loans that had been
originated in California, but the SPEs did not specifically target California or any state—
to them, it was irrelevant where the underlying borrowers were located. Neither SPE
directed how HDCC, the bank, or the dealers obtained loans.
Pursuant to written agreements, the SPEs established trusts capable of issuing
securities. After purchasing loan pools from HDCC at fair value, the SPEs sold the pools
(with security interests) to the trusts. The trusts then issued securities backed by the loan
pools. Third-party underwriters purchased the securities from the trusts, marketed the
securities, and resold them in the open market.
20
As owners of the loans (through the trusts), the SPEs were responsible for
servicing them. They did this by entering into servicing contracts with HDCC, which
HDCC performed, primarily from Nevada, for a fee.
5. The SPEs
HDCC could not directly securitize the loans itself because that would expose
investors to the risks—particularly the bankruptcy risk—associated with Harley-
Davidson's business. Without a shield from a potential bankruptcy, the cost to HDCC to
borrow against the underlying loans would have been significantly higher.
Instead, HDCC used the SPEs. They had no offices, agents, employees, or
property in California. In fact, they had no employees at all. The SPEs did not advertise
or solicit business in California, and nearly all of their functions were completed entirely
in Illinois and Nevada.
Each SPE was formed to exist as a corporation distinct from all other Harley-
Davidson entities. Each SPE had two independent directors (out of four), kept separate
records and accounts, paid its own expenses, was adequately capitalized, and earned a
reasonable return on the securitization transactions with HDCC. Each SPE's articles of
incorporation (1) prohibited it from undertaking any activities that could cause it to
become insolvent; (2) permitted only activities related to acquiring loan receivables and
related assets and rights from HDCC, entering into agreements for the servicing and sale
of those assets, and engaging in activities necessary, convenient, or advisable to
accomplish those ends; and (3) could not be amended without a prior confirmation from
21
ratings agencies that amendment would not affect the rating of securities issued by it
through its trusts.
With each securitization, a highly reputable law firm issued a legal opinion
confirming the bankruptcy-remote status of the SPEs.
6. The Trial Court Ruling
Following a bench trial, the court found the SPEs taxable in California. In its
statement of decision, the court found that even though the SPEs were separate entities
with no direct presence or business activity in California, HDCC, HDFS, and the
independent dealers were the SPEs' agents and those agents' activities in California
conferred taxable nexus over the SPEs. The court later clarified in its order denying
Harley-Davidson's motion for reconsideration "that the 'substantial nexus' was found
under both the [c]ommerce [c]lause and the [d]ue [p]rocess [c]lause."
Harley-Davidson timely appealed.
B. Nexus Overview
"The principle that a [s]tate may not tax value earned outside its borders rests on
the fundamental requirement of both the [d]ue [p]rocess and [c]ommerce [c]lauses that
there be 'some definite link, some minimum connection, between a state and the person,
property or transaction it seeks to tax.' " (Allied-Signal, Inc. v. Director, Div. of Taxation
(1992) 504 U.S. 768, 777, quoting Miller Brothers Co. v. Maryland (1954) 347 U.S. 340,
344-345; Container Corp. of Am. v. Franchise Tax Bd., supra, 463 U.S. at p. 164 ["Under
both the [d]ue [p]rocess and the [c]ommerce [c]lauses of the Constitution, a [s]tate may
not, when imposing an income-based tax, 'tax value earned outside its borders.' "].)
22
Although the due process and commerce clauses " 'are closely related,' " they "pose
distinct limits on the taxing powers of the [s]tates. Accordingly, while a [s]tate may,
consistent with the [d]ue [p]rocess [c]lause, have the authority to tax a particular
taxpayer, imposition of the tax may nonetheless violate the [c]ommerce [c]lause." (Quill
Corp. v. North Dakota (1992) 504 U.S. 298, 305 (Quill).)
"Due process centrally concerns the fundamental fairness of governmental
activity. Thus, at the most general level, the due process nexus analysis requires that we
ask whether an individual's connections with a [s]tate are substantial enough to legitimate
the [s]tate's exercise of power over him." (Quill, supra, 504 U.S. at p. 312.) Therefore,
the United States Supreme Court has "often identified 'notice' or 'fair warning' as the
analytic touchstone of due process nexus analysis." (Ibid.) Consequently, for taxation
and personal jurisdiction alike, "the relevant inquiry [is] whether a defendant had
minimum contacts with the jurisdiction 'such that the maintenance of the suit does not
offend "traditional notions of fair play and substantial justice." ' " (Id. at p. 307, quoting
International Shoe Co. v. Washington (1945) 326 U.S. 310, 316.) Thus, "if a foreign
corporation purposefully avails itself of the benefits of an economic market in the forum
[s]tate, it may subject itself to the [s]tate's in personam jurisdiction even if it has no
physical presence in the [s]tate." (Quill, at p. 307.)
"In contrast, the [c]ommerce [c]lause and its nexus requirement are informed not
so much by concerns about fairness for the individual defendant as by structural concerns
about the effects of state regulation on the national economy." (Quill, supra, 504 U.S. at
p. 312.) State taxation satisfies the commerce clause "[1] when the tax is applied to an
23
activity with a substantial nexus with the taxing [s]tate, [2] is fairly apportioned, [3] does
not discriminate against interstate commerce, and [4] is fairly related to the services
provided by the [s]tate." (Complete Auto Transit, Inc. v. Brady (1977) 430 U.S. 274,
279; Quill, at p. 311.) "The first and fourth prongs . . . limit the reach of state taxing
authority so as to ensure that state taxation does not unduly burden interstate commerce.
Thus, the 'substantial nexus' requirement is not, like due process' 'minimum contacts'
requirement, a proxy for notice, but rather a means for limiting state burdens on interstate
commerce." (Quill, at p. 313.) Therefore, at least in the context of sales and use tax
commerce clause nexus, the United States Supreme Court has reiterated a "bright-line,
physical-presence requirement." (Quill, at p. 315 ["Whether or not a [s]tate may compel
a vendor to collect a sales or use tax may turn on the presence in the taxing [s]tate of a
small sales force, plant, or office."]; National Bellas Hess, Inc. v. Department of Revenue
of State of Ill. (1967) 386 U.S. 753, 758 ["the Court has never held that a [s]tate may
impose the duty of use tax collection and payment upon a seller whose only connection
with customers in the [s]tate is by common carrier or the United States mail"].)11
11 The Quill court recognized that it had "not adopted a similar bright-line, physical- presence requirement" for "other types of taxes." (Quill, supra, 504 U.S. at p. 317.) Indeed, the majority of state courts that have considered the issue have concluded that economic presence is sufficient to satisfy the commerce clause for taxes other than sales and use taxes. (See Alexander Smith, Quill by Affiliation (2012) 66 U.Miami L.Rev. 755, 762 [collecting cases]; Armikka R. Bryant, Economic Nexus in Washington State: Defining Substantial Nexus (2012) 30 Quinnipiac L.Rev. 301, 320-321 [same].) We need not decide this issue here because, as discussed post, the trial court's determination was based at least in part on the physical presence of the SPEs' agent. 24
The physical-presence requirement need not be satisfied directly by the taxpayer
itself; it can be satisfied by independent contractors, "jobbers," and agents acting on the
taxpayer's behalf. (Tyler Pipe Industries v. Dept. of Revenue (1987) 483 U.S. 232, 250
(Tyler Pipe) [independent contractors]; Scripto v. Carson (1960) 362 U.S. 207, 211
[jobbers]; Illinois Commercial Men's Assn. v. State Bd. of Equalization (1983) 34 Cal.3d
839, 849 (Illinois Commercial) [independent contractors]; Borders Online v. State Bd. of
Equalization (2005) 129 Cal.App.4th 1179, 1189-1190 (Borders) [agents].) All that is
required is that the " 'activities performed in [the taxing] state on behalf of a taxpayer are
significantly associated with the taxpayer's ability to establish and maintain a market in
the taxing state for the sales.' " (Tyler Pipe, at p. 250.)
C. Standard of Review
"On review, the question of jurisdiction is, in essence, one of law. When the facts
giving rise to jurisdiction are conflicting, the trial court's factual determinations are
reviewed for substantial evidence. [Citation.] Even then, we review independently the
trial court's conclusions as to the legal significance of the facts. [Citations.] When the
jurisdictional facts are not in dispute, the question of whether the defendant is subject to
personal jurisdiction is purely a legal question that we review de novo." (Dorel
Industries, Inc. v. Superior Court (2005) 134 Cal.App.4th 1267, 1273.)
Under the substantial evidence standard of review, "the power of an appellate
court begins and ends with the determination as to whether there is any substantial
evidence, contradicted or uncontradicted, which will support the finding of fact."
(Grainger v. Antoyan (1957) 48 Cal.2d 805, 807, italics omitted.) We are required to
25
accept all evidence that supports the successful party, disregard the contrary evidence,
and draw all reasonable inferences to uphold the judgment. (Minelian v. Manzella (1989)
215 Cal.App.3d 457, 463.) "While substantial evidence may consist of inferences, such
inferences must be 'a product of logic and reason' and 'must rest on the evidence'
[citation]; inferences that are the result of mere speculation or conjecture cannot support a
finding [citations]." (Kuhn v. Department of General Services (1994) 22 Cal.App.4th
1627, 1633.) Thus, it is not our role to reweigh the evidence, redetermine the credibility
of the witnesses, or resolve conflicts in the testimony, and we will not disturb the
judgment if there is evidence to support it. (Reichardt v. Hoffman (1997) 52 Cal.App.4th
754, 766; see Leff v. Gunter (1983) 33 Cal.3d 508, 518.) "The ultimate test is whether it
is reasonable for a trier of fact to make the ruling in question in light of the whole
record." (Roddenberry v. Roddenberry (1996) 44 Cal.App.4th 634, 652.)
D. The SPEs' Nexus with California Satisfies the Due Process and Commerce Clauses
The trial court found that, "[a]lthough [the SPEs] are separate corporations, HDFS
and HDCC are their agents in California . . . ." Harley-Davidson argues substantial
evidence does not support the existence of an agency relationship and, even if one
existed, that the agents' conduct was insufficient to establish a sufficient nexus with
California. We are not persuaded.
1. Substantial Evidence Supports the Finding of an Agency Relationship
" '[T]he existence of an agency relationship is usually a question of fact, unless the
evidence is susceptible of but a single inference.' " (Borders, supra, 129 Cal.App.4th at
26
p. 1189.) "An agent is one who represents another, called the principal, in dealings with
third persons. Such representation is called agency." (Civ. Code, § 2295; Borders, at
p. 1189; Scholastic Book Clubs, Inc. v. State Bd. of Equalization (1989) 207 Cal.App.3d
734, 737 (Scholastic).) "An agency relationship 'may be implied based on conduct and
circumstances.' " (Borders, at p. 1189, quoting Scholastic, at pp. 737-738.)
In Borders, the Court of Appeal affirmed the trial court's finding that an out-of-
state online bookseller (Online) had sufficient nexus with California based on an agency
relationship with its sister corporation (Borders), which operated brick-and-mortar stores
in California. (Borders, supra, 129 Cal.App.4th at p. 1190.) Although Online and
Borders were separately established legal entities owned by Borders Group, Inc., "[t]wo
people who served on Online's board of directors also served on Borders's three-person
board of directors," and "[a]ll but two of the nine people who served as officers of Online
during the disputed period . . . also served as officers of Borders at some point during the
disputed period." (Id. at p. 1185.) The sister entities shared a similar logo and some
financial and marketing data, but did not intermingle their corporate assets. (Ibid.)
Despite this corporate separateness, the trial court found—and the Court of Appeal
agreed—that each sister-entity's policy allowing for customers to return merchandise
purchased from Online at Borders stores located in California established Borders as
Online's agent. (Id. at p. 1190.)12
12 In reaching this determination, the Borders court relied on Scholastic. There, the Court of Appeal affirmed the trial court's finding that an out-of-state mail-order bookseller had a sufficient taxation nexus with California based on agency relationships 27
Similarly here, although the SPEs are legally separate entities from HDCC,
substantial evidence supports the trial court's finding of an agency relationship between
the SPEs and HDCC. To begin with, the SPEs were only formed so that HDCC could
obtain more favorable pricing from securitization investors than HDCC could obtain by
directly securitizing the loans itself. The SPEs were governed by directors and officers
who were also directors and officers of HDCC. The SPEs had no employees of their own
but, rather, acted entirely through HDCC employees. The SPEs were only permitted to
securitize HDCC loans. HDCC selected the pools of loans to securitize, administered the
sale of the SPEs' securities to underwriters, and indemnified the underwriters. HDCC
undertook collection activities on the SPEs' loans, and it was an HDCC employee who
visited an auction house in California on 17 days total to assist in the auction process—a
process designed to ensure the value of the collateral securing the loans held by the SPEs.
This evidence, and the reasonable inferences derived from it, supports the trial court's
finding that HDCC was the SPEs' agent.13
with in-state school teachers who voluntarily solicited book orders from their students. Although the teachers were not obligated to solicit orders from their students, once they did "they [were] obviously acting under [Scholastic]'s authority, and certainly as [Scholastic]'s agents or representatives." (Scholastic, supra, 207 Cal.App.3d at p. 737.) "By accepting the orders, the payment and shipping the merchandise, [Scholastic] clearly and unequivocally ratified the acts of the teachers and confirmed their authority as [Scholastic]'s agents or representatives." (Id. at p. 738.)
13 Because of this conclusion, we need not also address the trial court's finding that HDFS and the motorcycle dealers were also the SPEs' agents. Nor, in light of our conclusion, do we need to address Harley-Davidson's contention that substantial evidence does not support the trial court's findings that "HDCC controlled [the SPEs]" and "[the SPEs] were not doing business for themselves but for HDFS." 28
Harley-Davidson argues we should apply a different, more rigid, three-factor test
for determining the existence of an agency relationship.14 We are not convinced, nor
was the Borders court. In Borders, Online argued the trial court erred by not applying
"California's 'four-factor test' to review the agency issue." (Borders, supra, 129
Cal.App.4th at p. 1190.)15 The Borders court disagreed, recognizing that although "it is
true courts consider these factors when considering agency issues in various contexts,
there is no bright-line 'four-factor test' in determining agency." (Ibid.) Indeed, the court
explained that "the cases Online relies on to advocate the existence of the so-called 'four-
factor test' were decided in other contexts, analyzed far different factual situations, and
did not necessarily apply each of the four 'factors' cited by Online." (Ibid.) The Borders
court further noted the Scholastic court did not apply the four-factor test proposed by
Online. (Id. at p. 1191, citing Scholastic, supra, 207 Cal.App.3d at pp. 737-738 & fn. 1.)
For the reasons discussed in Borders, we too decline to apply a rigid, three- or four-factor
test for determining agency.
Harley-Davidson acknowledges HDCC's auction-related conduct in California was
"arguably for the benefit of" the SPEs, but suggests it was not within the course and
14 Citing Alvarez v. Felker Mfg. Co. (1964) 230 Cal.App.2d 987, 999, Harley- Davidson asserts the "essential characteristics of an agency relationship" are "(1) [a]n agent or apparent agent holds a power to alter the legal relations between the principal and third persons and between the principal and himself; (2) an agent is a fiduciary with respect to matters within the scope of the agency; and (3) a principal has the right to control the conduct of the agent with respect to matters entrusted to him."
15 The four-factor test advocated by Online is essentially the three-factor test advanced by Harley-Davidson plus the additional factor of the agent's consent to act as the principal's agent. (Borders, supra, 129 Cal.App.4th at p. 1190.) 29
scope of an agency relationship, presumably because the conduct also benefitted HDCC.
The Borders court rejected a similar argument, reasoning that "[b]y accepting Online's
merchandise under the terms of Online's return policy, Borders was effectuating Online's
policy, even if it was also Borders' own policy." (Borders, supra, 129 Cal.App.4th at
p. 1191, italics added.) We likewise reject Harley-Davidson's suggestion that HDCC
could not have been acting as the SPEs' agent simply because HDCC's actions also
happened to benefit itself.
For the foregoing reasons, we conclude substantial evidence supports the trial
court's finding that HDCC was the SPEs' agent. We now "review independently the trial
court's conclusions as to the legal significance of th[is] fact[]." (Dorel Industries, Inc. v.
Superior Court, supra, 134 Cal.App.4th at p. 1273.)
2. The SPEs' Nexus Satisfies the Due Process Clause
We conclude the SPEs, through their agent HDCC, "had minimum contacts with
the jurisdiction 'such that the maintenance of the suit does not offend "traditional notions
of fair play and substantial justice." ' " (Quill, supra, 504 U.S. at p. 307.) The SPEs'
raison d'être was to cost-effectively generate liquidity for HDCC so that HDCC could,
among other things, make loans to Harley-Davidson dealers—including those in
California—for their purchases of inventory and for upgrades to their showrooms. The
loan pools contained more loans from California than from any other state.16 Most
16 For example, one prospectus indicates California loans comprised approximately 12 percent of the pool. The next most-represented states were Texas, at approximately 8 30
importantly, when California consumers defaulted on their loans, HDCC—as the SPEs'
agent—oversaw collection activities, including repossession and sale of the motorcycles
at California auctions. An HDCC employee even attended auctions on at least 17
different occasions. Under these circumstances, California's taxation of the SPEs
comports with " ' "traditional notions of fair play and substantial justice." ' " (Quill, at
p. 307.)
Harley-Davidson argues, citing F. Hoffman-La Roche, Ltd. v. Superior Court
(2005) 130 Cal.App.4th 782, that "[u]nder the [d]ue [p]rocess [c]lause, jurisdiction based
on agency requires 'pervasive and continuous operational control' over in-state entities by
the out-of-state parties." F. Hoffman-LaRoche is distinguishable. First, F. Hoffman-
LaRoche considered due process in the context of general personal jurisdiction (id. at p.
797), whereas taxation nexus is concerned with specific or limited personal jurisdiction.
F. Hoffman-LaRoche acknowledged that a court may exercise specific or limited personal
jurisdiction under essentially the same purposeful-availment test enunciated in Quill—the
test we applied above. (Ibid.) Second, F. Hoffman-LaRoche "appl[ied] jurisdictional
principles with an abundance of caution [because] the defendant is a foreign [i.e.,
international] corporation." (Id. at p. 795.) No similar concern is present here.
Harley-Davidson also argues that under J. McIntyre Machinery, Ltd. v. Nicastro
(2011) __ U.S. __ [131 S.Ct. 2780] (J. McIntyre Machinery), we may only find due
process purposeful availment if the SPEs "can be said to have targeted" California. In
percent; Florida, at approximately 7 percent; and Pennsylvania, at approximately 6 percent. 31
J. McIntyre Machinery, a British equipment manufacturer challenged a New Jersey
court's finding of personal jurisdiction in a personal injury case brought by a worker who
was injured by equipment manufactured by the defendant. The defendant argued it was
not subject to personal jurisdiction because (1) all its sales were made through an
independent distributor; (2) defendant's officials had attended annual conventions in the
United States, but never in New Jersey; and (3) "no more than four machines . . . ended
up in New Jersey." (Id. at p. 2786.) The New Jersey Supreme Court concluded the state
court could exercise personal jurisdiction over the defendant because the defendant had
placed its product in the " 'stream-of-commerce' " and, thus, "knew or reasonably should
have known 'that its products are distributed through a nationwide distribution system
that might lead to those products being sold in any of the [50] states." (Ibid.) The United
States Supreme Court held that more was required: "The defendant's transmission of
goods permits the exercise of jurisdiction only where the defendant can be said to have
targeted the forum; as a general rule, it is not enough that the defendant might have
predicted that its goods will reach the forum [s]tate." (Id. at p. 2788.)
J. McIntyre Machinery is inapposite. First, the SPEs did not act "through an
independent distributer," but rather, through their corporate parent with which they
shared directors and officers and through which they exclusively acted. Second, the
SPEs' agent did target California by attending 17 auctions here to assist in maintaining
the value of the motorcycles that secured the loans held by the SPEs.
In sum, we conclude the SPEs had a sufficient nexus with California to satisfy due
process concerns.
32
3. The SPEs' Nexus Satisfies the Commerce Clause
Harley-Davidson contends the substantial nexus required by the commerce clause
is lacking because the SPEs lacked a physical presence in California. We disagree. As
mentioned repeatedly above, the SPEs' agent, HDCC, sent an employee to auctions in
California on 17 separate occasions. An agent's presence satisfies the physical presence
requirement. (Tyler Pipe, supra, 483 U.S. at p. 250; Scripto v. Carson, supra, 362 U.S. at
pp. 211-212; Illinois Commercial, supra, 34 Cal.3d at p. 849; Borders, supra, 129
Cal.App.4th at pp. 1189-1190.)
Citing Tyler Pipe, Harley-Davidson asserts "third parties may give rise to nexus
for [an] out-of-state company if . . . their activities were 'significantly associated with the
taxpayer's ability to establish and maintain a market in th[e] state.' " (Modification in
original.) Harley-Davidson construes Tyler Pipe as requiring the third-party's conduct be
sales-related. And because the SPEs' market for the sale of securities are underwriters,
not California consumers, Harley-Davidson reasons the physical-presence requirement is
lacking. This argument fails from the outset, however, because the third-party's in-state
conduct need not be sales-related; it need only be "an integral and crucial aspect of the
businesses . . . ." (Illinois Commercial, supra, 34 Cal.3d at p. 840 ["Although plaintiffs
assert a distinction between the present case and Scripto because the salesmen in Scripto
solicited business for the foreign corporation, whereas here plaintiffs' agents did not
perform that function, we are unimpressed by such distinction. What is significant in the
present context is that the investigation and settlement of claims is an integral and crucial
aspect of the business . . . ."]; Hellerstein, State Taxation (3d ed. 2014) Jurisdiction to
33
Impose Corporate Income, Franchise, and Capital Stock Taxes, ¶ 6.09[1] ["there is
nothing in Tyler Pipe that can fairly be read to support the assertion that the only acts of
independent contractors that are capable of creating nexus over an out-of-state taxpayer
are those related to maintaining a market in the state"].) Participating in auctions of
repossessed motorcycles to maintain the value of the security interests underlying the
securitized loan pools is as integral and crucial to the SPEs' securitization business as was
the investigation and adjustment of insurance claims to the insurer in Illinois
Commercial.
Finally, Harley-Davidson argues that even if HDCC's auction-related conduct
would otherwise satisfy the commerce clause's physical-presence requirement, it
nonetheless falls short because "these infrequent visits" are "de minimis and do not give
rise to substantial nexus." We disagree. Borders cited with approval Arizona Dept. of
Revenue v. Care Computer Systems (Ariz.Ct.App. 2000) 197 Ariz. 414 [4 P.3d 469, 471-
472], in which a retailer had one salesman in Arizona approximately two days per year
and provided an average of approximately 20 days of training per year to Arizona
customers. Borders also cited with approval Orvis Co. v. Tax Appeals Tribunal (1995)
86 N.Y.2d 165 [630 N.Y.S.2d 680, 654 N.E.2d 954], in which New York's highest court
found substantial nexus over an out-of-state seller of computer hardware and software
whose sales agreements included a promise to provide one on-site visit should problems
arise within 60 days of the sale. (Id. at p. 180.) The seller had made 41 such trouble-
shooting trips to New York during a three-year period. (Id. at pp. 180-181.)
34
In Lamtec Corp. v. Dept. of Revenue (2011) 170 Wn.2d 838 [246 P.3d 788], the
Washington Supreme Court found a taxable nexus where, "[a]bout two or three times a
year during the tax period at issue, three Lamtec sales employees visited major customers
in Washington. During those visits, the employees did not solicit sales directly, but they
answered questions and provided information about Lamtec products." (Id. at p. 841.)
We conclude the SPEs' agent's participation in 17 auctions in California during the
Years at Issue established a substantial nexus for commerce clause purposes.
DISPOSITION
The judgment is reversed to the extent it is based on the superior court's order
sustaining the Board's demurrer to Harley-Davidson's first cause of action. The order
sustaining the demurrer as to the first cause of action is vacated and the superior court is
directed to enter an order overruling the demurrer as to that claim and to conduct further
proceedings consistent with this opinion. The judgment is affirmed in all other respects.
All parties are to bear their own costs on appeal.
BENKE, Acting P. J.
WE CONCUR:
HUFFMAN, J.
O'ROURKE, J.
35
AI Brief
AI-generated · verify before citing
Holding. The court held that California's tax scheme, which allows intrastate unitary businesses to choose between combined reporting and separate accounting while mandating combined reporting for interstate unitary businesses, is facially discriminatory under the Commerce Clause. The court remanded the case for the trial court to determine if the scheme survives strict scrutiny.
Issues
Whether California's statutory scheme for computing tax liability for unitary businesses violates the Commerce Clause by treating intrastate and interstate businesses differently.
Whether two Harley-Davidson subsidiaries had a sufficient nexus to California to satisfy due process and Commerce Clause requirements for taxation.
Disposition. Affirmed in part and reversed in part.
Quotations verified verbatim against the opinion
“We conclude the trial court erred in sustaining the demurrer because the statutory scheme facially discriminates on the basis of an interstate element in violation of the commerce clause.”