The Wisconsin Tax Appeals Commission sided with the Department of Revenue, ruling that American Honda Motor Co.’s sale of environmental credits generated apportionable income for corporate income and franchise tax purposes. American Honda bought vehicles from related companies and resold them to car dealerships and other retailers in the U.S.
When American Honda sold its environmental credits to other automakers, it reported the sale proceeds as non-apportionable income, sourced outside of Wisconsin. In analyzing whether the sales generated apportionable income, the Commission explained that under Wisconsin law, the income is apportionable if it is unitary income, operational income, or other income with a taxable presence in the state. After determining that the income did not have a taxable presence in the state, the Commission found that the sales generated operational income because the credits were integral to American Honda’s unitary business and did not serve an investment function. The Commission reasoned that the company earned the credits through its manufacture and distribution of fuel-efficient and low-polluting vehicles, which is the combined group’s unitary business activity. Further, if American Honda needed to use the credits in the future, they would be integral operational assets that would save the company the expense of meeting fuel efficiency and emissions standards. As such, the Commission concluded that the credits are integral to the company’s automating operations.
Next, the Commission ruled that American Honda’s income from selling the credits was also unitary income. The company’s activities to comply with federal environmental standards, which generated the credits, were unitary because they are “very much related” to the automaking business and benefit the combined group, which could use or sell the credits. The Commission noted that these compliance activities “are clearly functionally integrated” with the vehicle manufacturing activities to the benefit of the group. Because the unitary enterprise generates the credits and the sale of credits requires the coordination of company unitary resources, the sale of the credits generated apportionable income.