The Alaska Supreme Court found that Alaska’s combined reporting statute requiring taxpayers to include certain foreign affiliates in its income tax return was constitutional. The court rejected the taxpayer’s arguments that Alaska’s tax haven corporation reporting statute was (i) void for vagueness as it violated the Due Process Clause, (ii) discriminated against interstate commerce in violation of the Commerce Clause, and (iii) was arbitrary and irrational under the Due Process Clause.
The statute in question, AS 43.20.145(a)(5), requires Alaska taxpayers to include in their combined return:
- (5) a corporation that is incorporated in or does business in a country that does not impose an income tax, or that imposes an income tax at a rate lower than 90 percent of the United States income tax rate on the income tax base of the corporation in the United States, if
- (A) 50 percent or more of the sales, purchases, or payments of income or expenses, exclusive of payments for intangible property, of the corporation are made directly or indirectly to one or more members of a group of corporations filing under the water’s edge combined reporting method;
- (B) the corporation does not conduct significant economic activity.
Subpart A and Subpart B are only separated by a semicolon – but neither “and” nor “or”, as is common – giving rise to the dispute that this provision was unconstitutionally void for vagueness as the statute did not provide notice as to what affiliates are required to be included in the return.
The Alaska Supreme Court rejected the taxpayer’s vagueness argument, finding that when evaluating whether a statute is void for vagueness, a court is tasked with looking beyond the terms in the statute to its history, case law, and other provisions that can assist in establishing a reasonably clear meaning. The court also noted that because the statute in question is a civil statute, and not a criminal one, a more lenient vagueness standard applies. Given these interpretive tools, and the more lenient vagueness standard, the court determined that the law was not unconstitutionally vague, and using the disjunctive “or” between Subparts A and B was appropriate.
The court also rejected the taxpayer’s Commerce Clause challenge, finding that the law was not facially discriminatory because filing a return was not a discriminatory burden, and the law had no discriminatory effect on interstate commerce—which depends on the apportionment formula, which was not challenged. Finally, the court found that the law was not arbitrary and irrational under the Due Process Clause, noting that the law was based on the reporting threshold used by the IRS, and simply because a law is characterized as numerically arbitrary does not make it constitutionally arbitrary.
Department of Revenue v. Nabors International Finance Inc. & Subsidiaries, No. S-17883/17903 (Alaska, Aug. 5, 2022).