Anthony Kennedy

“ But we need not rely upon Trinova's 14 Michigan sales personnel as the source of all the value added that can be apportioned fairly to Michigan. In a unitary enterprise, compensation, depreciation, and profit are not independent variables to be adjusted without reference to each other. If Trinova had paid an additional $100 million in compensation during 1980, there is no way of knowing whether, or to what extent, value added would have increased. In fact, value added would not have increased so long as revenues did not increase. ”

“ A VAT differs in important respects from a corporate income tax. A corporate income tax is based on the philosophy of ability to pay, as it consists of some portion of the profit remaining after a company has provided for its workers, suppliers, and other creditors. A VAT, on the other hand, is a much broader measure of a firm's total business activity. ”

“ We have always "declined to undertake the essentially legislative task of establishing a 'single constitutionally mandated method of taxation.' " Id., at 261, 109 S.Ct., at 588, quoting Container Corp., 463 U.S., at 171, 103 S.Ct., at 2943. We do not say today whether other States should adopt a value added tax, or whether Michigan's three-factor formula is the only acceptable method of apportionment. We do hold that, as applied to Trinova during the tax year at issue, the Michigan SBT does not violate the Due Process or Commerce Clauses of the Constitution. ”

“ If it were not for their age, these criticisms could have been taken almost verbatim from Trinova's brief: " [S] ales-by-destination are not a proper allocation factor. . . . Taken by themselves, they do not necessarily represent the location of the company's productive income-creating effort. Only the location of the company's capital and labor, which may be wholly different from the destination of the sales, identifies the location of that effort and hence the situs for the imposition of a state income tax upon it." ”

“ The bakery's costs consist of materials (flour, sugar, spices, utilities) , labor (baker, sales clerk) , capital (building, mixer, utensils, oven) , and credit (interest paid on loans) . Any excess of revenues over costs represents profit. Thus:
Revenue = Cost of Labor + Cost of Materials +
Because value added is defined as the difference between the value of products sold (revenues) , and the cost of materials going into the products, we can represent value added (for the entire firm) by a second simple equation: Value added = Revenues - Cost of Materials. ”

“ Michigan is the first and, the parties tell us, the only State to have enacted a VAT as a tax on business activity. We begin with a description of value added and VAT's in general, and then discuss the Michigan SBT.
Value added is an economic concept. "Value added is defined as the increase in the value of goods and services brought about by whatever a business does to them between the time of purchase and the time of sale." ”

“ The Michigan Supreme Court noted that formulary apportionment of income taxes is uncontroversial and that it did "not believe that 'business activity' as defined under the [SBT] is susceptible to accurate analysis when only one component of the total business effort is examined." Id., at 163, 445 N.W.2d, at 438. The court concluded that Trinova's averaged ratios of payroll, property, and sales are a fair representation of the extent of its business activity in Michigan, making it ineligible for relief on statutory or constitutional grounds. ”

“ See generally Kleine 3, figure 1. " 'The logic or rationale of the [VAT] rests squarely on the benefits received principle of taxation-government services are essential to the operation of any business enterprise . . . and a part of these public service costs should properly be included in the cost of doing business.' " Id., at 4 (citation omitted) .
The SBT Analysis, at 20-21, provides us with the following simplified example of how value added is determined. Assume a bakery's sole revenue comes from the sale of bread. ”

“ Before 1976, a typical manufacturer with business activity in Michigan would have been subject to a franchise tax, an income tax, an intangible property tax, and an ad valorem property tax upon inventories. ”

“ See Container Corp., 463 U.S., at 182 [103 S.Ct., at 2949] (the costs of a unitary business cannot be deemed confined to the locality in which they are incurred) ." Ibid.
The reasoning of Amerada Hess Corp. applies with equal force to the case here. The same factors that prevent determination of the geographic location where income is generated, factors such as functional integration, centralization of management, and economies of scale, make it impossible to determine the location of value added with exact precision. ”

“ District of Columbia, 380 U.S. 553, 561, 85 S.Ct. 1156, 1161, 14 L.Ed.2d 68 (1965) , Trinova argues that the formula does not reflect how the value added tax base is generated. The principal flaw, it contends, is that the formula includes a sales factor. "Sales have no relationship to, and add nothing to, the value that [compensation and depreciable plant] contribute to the tax base in Michigan." ”

“ Second, if a taxpayer does business both within and without Michigan, it must determine the portion of its total value added attributable to Michigan. That portion, the crux of this case, is the average of three ratios: (1) Michigan payroll to total payroll, (2) Michigan property to total property, and (3) Michigan sales to total sales. §§ 208.45, 208.46, 208.49, 208.51. The total tax base is multiplied by the portion of business activity attributable to Michigan (under the three-factor formula) , and the result, subject to several further adjustments, is the taxpayer's "adjusted tax base." ”

“ SBT Analysis 20 (addition and subtraction are "two alternative, but equivalent ways of calculating value added. . . . The important point is that, conceptually, these two calculations are equal ") .↑ The nations of the European Economic Community (EEC) each levy a value added tax under yet a third method, as a multistage sales tax. See generally Aaron. Under the EEC system, the bakery in our example would be taxed on each sale of bread, and would receive a credit for each purchase of materials going into production of the bread. ”

“ Under the two-factor formula that Trinova now urges upon us, it is $360,213.↑ As an alternative ground for upholding the tax, Michigan reminds us that, instead of taxing value added, it could have taxed gross receipts of sales into Michigan. We have repeatedly upheld such taxes. ”

“ Chamberlain, 254 U.S. 113, 120-121, 41 S.Ct. 45, 46-47, 65 L.Ed. 165 (1920) (legislature "faced with the impossibility of allocating specifically the profits earned by the [taxpayer's] processes conducted within its borders") . ”