Maine: Alternative Apportionment Not Permitted to Apportion Gain from Sale of Pizza Business

The Maine Supreme Judicial Court recently held that gain from the sale a company’s pizza business was income that should be apportioned using the entire unitary business’ apportionment factor. The taxpayer, Kraft, manufactured and sold various food and beverage products, including frozen pizza products, in Maine and throughout the United States.  In 2010, Kraft sold its entire frozen pizza business and excluded the $3.6 billion gain from the sale on its Maine corporate income tax return based on its assertion that the income was not taxable under either the Maine Constitution or the United States Constitution.  Kraft also excluded the receipts from the sale in calculating its 2010 Maine apportionment factor.  Upon audit, Maine Revenue Services disallowed the subtraction.  

Kraft appealed to the Board of Tax Appeals where it was determined that the gain was includable in Kraft’s tax base, but was subject to alternative apportionment. Specifically, the Board concluded that the gain from the sale of the pizza business should be apportioned using the Maine sales factor of the pizza business only, rather than the factor of Kraft’s entire business. The rest of the taxpayer’s income was apportioned using a factor that looked to the overall sales in Maine over the everywhere sales. Neither sales factor included the proceeds from the sale of the pizza business in the numerator or denominator.   The Board also abated the substantial understatement penalty on the basis that there was “substantial authority” for Kraft’s filing position. Maine Revenue Services then appealed to the Superior Court, which held that Kraft was not entitled to alternative apportionment.

Under Maine law, the default method of apportioning a corporate taxpayer’s income is based on the taxpayer’s sales factor.  An alternative apportionment method may be appropriate if the sales factor does not fairly represent the extent of the taxpayer’s business in the state.  Kraft argued before the State’s highest court that it was entitled to alternative apportionment because the income from the sale of the pizza business was generated by the frozen pizza business rather than by Kraft’s overall food product sales, and that pizza was simply not a big seller in Maine relative to its other products.  The Court rejected this argument, noting that the pizza business was clearly part of Kraft’s unitary business and that applying alternative apportionment to a segment of a unitary business is inconsistent with one of the core principles justifying the use of a sales factor formula to apportion the income of a unitary business.  In other words, applying alternative apportionment to different business divisions would fail to account for the factors of profitability that arise from the operation of the business as a whole.  The Court also rejected Kraft’s contention that using the entire group’s sales factor was unfair because Maine sales  of products of the pizza business were lower than the Maine sales of Kraft’s other business lines.  The Court noted that this argument would ultimately lead to the conclusion that apportioning the income of a unitary business using the sales factor of the entire business would not fairly represent the business activity in the state, effectively rendering the default method of apportioning income useless.  The Court also noted that Kraft’s reliance on two cases from California was misplaced because the facts in those cases were clearly distinct from the current situation. After reviewing whether the pizza business was unitary with Kraft’s other entities, the Court also concluded that the taxpayer was not entitled to an abatement of the substantial understatement penalty because there was not support for its position that the gain was non-unitary income. For more information on State Tax Assessor v. Kraft Foods Group, Inc., et al., please contact Nikhil Sequeira at (617) 988-1787.